Introduction
As of May 2025, the Indian rupee has emerged as Asia’s worst-performing currency, depreciating by approximately 1.27% against the U.S. dollar to close the month at ₹85.57 per dollar. This decline marks a reversal from its April appreciation to around ₹83.94, driven by a confluence of domestic and global factors.(quantamminds.com, The Economic Times)
📉 Key Drivers of the Rupee’s Decline
1. Geopolitical Tensions and Tariff Uncertainties
Heightened border tensions, particularly with Pakistan, have increased geopolitical risks, dampening investor confidence. Additionally, uncertainties surrounding U.S. trade tariffs have contributed to market volatility, leading to capital outflows and increased demand for the U.S. dollar. (The New Indian Express, mint)
2. Foreign Portfolio Investment (FPI) Outflows
In the first quarter of 2025, FPIs withdrew over ₹1.12 lakh crore (approximately $13.5 billion) from Indian equities, exerting significant pressure on the rupee. This trend has persisted, with continued outflows in subsequent months. (The Financial Express)
3. Corporate Dollar Demand
Increased month-end dollar demand from Indian corporations, particularly importers, has added pressure on the rupee. This demand has been fueled by rising crude oil prices and the need to hedge against currency volatility. (The New Indian Express)
4. Expectations of Monetary Easing by the RBI
Market expectations of further monetary easing by the Reserve Bank of India (RBI) have contributed to the rupee’s weakness, as investors anticipate lower interest rates reducing the currency’s appeal. (The Economic Times)
5. Strengthening of the U.S. Dollar
A U.S. court ruling that blocked proposed tariffs temporarily removed trade-related uncertainties, bolstering the U.S. dollar. This development led to a stronger dollar index, which climbed above 100, exerting downward pressure on the rupee. (Reuters)
🏦 RBI’s Response and Policy Measures
The Reserve Bank of India has actively intervened in the foreign exchange markets to curb excessive volatility and prevent the rupee from breaching critical levels. Despite these efforts, the central bank has also been focused on rebuilding its foreign exchange reserves, which stood at $685.7 billion as of May 16—$19 billion below the previous high. (Reuters)
Additionally, the RBI is reviewing the Liberalised Remittance Scheme (LRS) in response to substantial outflows totaling approximately $30 billion in the fiscal year 2024-25. This review aims to rationalize the remittance framework and encourage the internationalization of the Indian rupee. (The Economic Times)
🔮 Outlook
While the rupee faces challenges from global economic factors and domestic pressures, the RBI’s interventions aim to stabilize the currency. However, continued vigilance is necessary as external uncertainties persist, and the currency may remain under pressure in the near term.