5 factors pulling the Indian rupee down to record low: Trump, trade & more

The Indian rupee has come under immense pressure and touch a historic low of 85.81 against the US dollar on Friday. Find out five big factors that are weighing on the INR

The Indian rupee touched an all-time low on the afternoon of Friday, December 27, 2024, and traded at 85.81 against the US dollar. Source: AFP.

Another day, another fall. The Indian rupee tumbled to a fresh life-time low of 85.81 against the US dollar on Friday. The INR decline today was the steepest in a single-day in the past six months, sinking 53 paise.

At the interbank foreign exchange, the rupee on Friday opened weak at 85.31 and within minutes, during mid session, it plunged to the lowest-ever level of 85.81, recording its steepest single-day fall since March 22 this year when the unit settled 48 paise lower.

The earlier sharpest single-day fall of 68 paise was recorded on February 2, 2023.

Reasons for rupee falling to a record low

1 - Trump wins, rupee loses

Over the last few months the Indian rupee has been witnessing a lot of volatility, however, it saw a massive drop against the dollar ever since Donald Trump won the 2024 US presidential election, falling from 84.11 to a dollar on November 5 to 85.81 on December 27.
Since Trump’s victory there has been a rally in the dollar which is weighing on the rupee.

The 10-year US Treasury yield rose to the highest since late May on Tuesday. The dollar index is hovering near year-to-date highs on expectations that Trump’s policies will lift growth and inflation.

The prospects of higher inflation prompted Federal Reserve officials, earlier this month, to project fewer rate cuts next year.

2 - Rising demand for dollar

There has also been an increasing demand for dollars from Indian importers, especially those in the oil sector, as they prepare to meet higher import bills.

This increase in demand for dollars is further putting pressure on the rupee.

3 - India’s changing balance of payments (BoP) picture

India’s trade deficit has widened by 18.4 per cent year-on-year from April to November, according to the calculations by IDFC First Bank.

Meanwhile, outflows from equity and debt are tracking $10.3 billion this quarter, reversing from inflows of $20 billion in the previous quarter, the data by NSDL stated.

This combination, as per economists, has resulted in a BoP deficit in the current quarter.

The BoP is estimated to be $20 billion to $30 billion this fiscal year, compared to a surplus of over $60 billion in the previous fiscal.

IDFC said that the BoP outflows, coupled with a strong dollar, will keep the rupee under pressure, forecasting that the currency will weaken to 86 by September 2025.

4 - Drop in FPIs

The fall in the rupee was also due to the outflow of foreign portfolio investments (FPIs) from Indian markets.

In 2024, FPI outflows were recorded during the months of January, April, May, October, and November.

Also in 2024, there was a drastic decline in FPIs flow due to a combination of global and domestic factors.

Till December 24, 2024, foreign portfolio investors have made a net investment of over Rs 5,052 crore in the Indian equity markets and Rs 1.12 lakh crore in the debt market.

5 - High crude oil price pushes rupee down

Global crude oil prices are inversely proportional to the value of the rupee, i.e. if the value of crude oil eases, the value of the rupee appreciates and vice versa.

The crude oil benchmarks remain poised for a weekly gain, getting support from reports of recovery in China’s economic recovery. As of the latest update, Brent crude, the global oil benchmark, rose 0.07 per cent to $73.31 per barrel in futures trade.

Impact of weak rupee

There are both negative as well as positive impacts if the rupee gets weaker than the dollar.

Negative impacts include inflation as India imports nearly 80 per cent of its crude oil needs for which it has to pay in foreign currency. This would mean that imports would become costlier and travel through the value chain would raise input costs.

Also, considering that a large proportion of India’s imports are dollar-denominated, these imports will get costlier which will in turn widen the trade deficit as well as the current account deficit, this in turn, will put pressure on the exchange rate.

As for the positive impact, remittances from overseas could become attractive as a fall in the rupee can.

A weak rupee is also seen as bullish for pharma companies, which earn a sizeable part of their revenue from exports.