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In recent months, the Indian rupee has been trading lower against the US dollar, depreciating by about 3.5 percent, reaching 87.18 on March 7.

This fall comes as foreign institutional investors remain offloading equities, accompanied by month-end demand for dollars amongst importers.

According to Forex traders, the ongoing uncertainty regarding the US tariff imposition has left the market in flux. Also, this tariff chaos brought volatility and uncertainty into the US dollar index.

Comparing this with Chinese Yuan and Japanese Yen, these foreign currencies witness milder depreciation of 1.7 per cent and 0.7 per cent respectively.

However, the Indian government is confident that the rupee will recover this fall and return to the December levels through India's foreign exchange reserves.

The central bank will make strategic interventions to slow the currency's decline, ensuring stability in the market. The RBI is taking a firm stand on the Rupee's defence amid concerns about depreciation.

During this economic turmoil, investors must shift their focus towards high return smallcase portfolios across themes to mitigate risk.

In this article, we educate on how Rupee depreciation affects the economy, its relation to strengthening of the U.S Dollar and more.

Table Of Contents:

Key Reasons For Rupee Depreciation

Here are the reasons for Rupee Depreciation:

  • Strengthening US Dollar: The US Dollar Index (DXY), which measures the dollar’s value against a basket of currencies, has been trending upwards. The Federal Reserve's hawkish monetary policy stance is a major contributor. Higher interest rates in the US attract foreign investment, increasing the demand for the dollar.
  • Global Trade Tensions: Intensified trade war risks and uncertainty surrounding US trade policies have pressured the Rupee and other Asian currencies. The potential implementation of reciprocal tariffs by the US could further impact India, given its significant trade with the US.
  • Shift in RBI Policy: Under Governor Sanjay Malhotra, the Reserve Bank of India (RBI) has adopted a more flexible approach, allowing the Rupee to move freely with other emerging market currencies. This contrasts with the previous stance of maintaining a stable Rupee against the dollar.
  • Rising Crude Oil Prices: India imports a significant portion of its crude oil requirements. Rising crude oil prices increase the demand for US dollars to pay for these imports, leading to the Rupee depreciation.

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Factors Impacting Rupee’s Weakening

1. Foreign Investor Selling Off Indian Equities

When foreign investors consistently sell their holdings in the Indian equity and debt market, they convert Rupees back into their home currencies, often US dollars. This has resulted in an increase in the supply of Rupee, weakening its value.

2. Increasing India's Trade Deficit

India witnesses a large trade deficit, where imports exceed exports, which puts downward pressure on the Rupee.

This trade deficit widened recently, contributing to the currency's depreciation.

This is primarily due to higher imports of crude oil and other essential goods, which has increased demand for foreign currencies, weakening the rupee.

3. RBI Strategic Intervention To Stabilise Market

The Reserve Bank of India (RBI) intervenes in the foreign exchange market to manage volatility.

The RBI sells US dollars from its reserves to stabilise the Rupee. However, excessive intervention can deplete foreign exchange reserves.

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Conclusion

The Indian rupee’s depreciation against the US Dollar in 2025 is a consequence of global and domestic economic shifts such as India’s trade deficit, foreign investors selling Indian stocks, RBI policy shift, strengthening of the US dollar and others

Investors need to be vigilant towards these market changes and trends, and align their investment strategy accordingly. What defines the best risk management in such scenarios, is collaborating with a reputed wealth management brand.

We, at PINC Wealth, offer expert-driven, research-backed, and thoughtfully structured smallcase portfolios designed to help investors navigate dynamic market conditions. Start your smallcase investment today!

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