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Rupee Falls as Trade and Fiscal Deficits Persist

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  Published in Business and Finance on Thursday, December 4th 2025 at 0:17 GMT by Zee Business

USD vs. INR: Why the Rupee Is Falling, Explained by Anil Singhvi

The Indian rupee has once again slipped against the U.S. dollar, sparking questions among investors, traders and policymakers alike. In a recent feature on Zeebiz, renowned economist Anil Singhvi unpacks the multiple forces that are pushing the currency lower, and he gives readers a clear roadmap of what to watch for in the coming months. Below is a concise but comprehensive summary of his key points, enriched with contextual links and supporting data that the article cites.

1. The “Classic” Fundamentals: Trade, Finance and Fiscal Policy

Current‑Account Deficit (CAD)
- The rupee’s decline is partly a reflection of India’s persistent current‑account deficit. Even as domestic demand has surged, imports of oil, machinery and high‑tech components keep outflowing capital. Singhvi points out that a CAD of roughly ₹10.6 trillion in FY 2023‑24 (≈ 2.8 % of GDP) signals that India is still net‑importing of goods and services. The article links to RBI’s quarterly data, which confirms that the deficit is still above the “green‑zone” (≤ 3 % of GDP) set by the Ministry of Finance.

Fiscal Deficit and Public Debt
- The government’s fiscal deficit hovered at 6.5 % of GDP last year, and the debt‑to‑GDP ratio crossed 70 % after the 2024 budget. Singhvi stresses that a widening fiscal gap pushes the government to borrow, often in foreign currency, further underlining the rupee’s vulnerability. He cites the Ministry of Finance’s Budget Speech 2024 as a primary source of these figures.

Domestic Liquidity
- The RBI’s open‑market operations and the repo‑rate decisions also play a role. The Reserve Bank’s latest repo‑rate hike (to 6.70 % from 6.50 %) was intended to curb inflation, yet it simultaneously drains liquidity from the market, making the rupee more attractive for foreign investors seeking safer returns. Singhvi references RBI’s “Policy Statement – February 2025” for the policy stance.

2. Global Headwinds: US Monetary Policy & Oil Prices

Federal Reserve’s Tightening Cycle
- The U.S. Fed has moved from an accommodative stance (near‑zero rates and large QE programs) to aggressive tightening: rates currently at 5.25 % and a $400 billion quarterly asset‑purchase program. Singhvi notes that higher U.S. yields draw capital away from emerging markets, including India. The article links to the Fed’s latest “Monetary Policy Report” for the official rate and forward guidance.

Oil Price Volatility
- Global oil prices have spiked to $90–$95 a barrel in the last quarter due to supply constraints in OPEC+ and geopolitical tensions in the Middle East. Because India is a net importer of oil, a rise in crude pushes import bills up, widening the CAD and feeding rupee depreciation. The article cites the “World Bank Commodity Markets Review” for price data.

Commodity Linkages
- Silver, copper and other metals that India imports also saw a price uptick. Singhvi explains that this commodity‑price surge adds to the external pressure on the rupee, especially when matched with domestic inflationary pressures.

3. Domestic Dynamics: Inflation, Growth and Policy Credibility

Retail Inflation
- Consumer price inflation in India recently hovered around 7.2 % (June 2025), driven by food and fuel costs. The RBI’s inflation‑targeting framework (4 % ± 2 %) therefore feels the pressure to keep rates high, which can suppress domestic investment and push the rupee lower. Singhvi links to the “RBI Retail Inflation Report” for the monthly figures.

GDP Growth Trajectory
- Economic growth slowed to 6.1 % YoY in Q2‑FY 2024‑25, below the 7 % target. A slower growth outlook reduces the attractiveness of the rupee for foreign portfolio investors. The article cites the “Centre for Monitoring Indian Economy” (CMIE) to back the growth data.

Government’s Credibility
- The government’s willingness to keep fiscal space in a tightening environment is questioned. Anil Singhvi cautions that a sustained fiscal deficit, if not matched by growth, may undermine investor confidence. The article references the “Economic Survey 2024‑25” for detailed fiscal analysis.

4. Market Sentiment and Speculation

Carry‑Trade Unwinding
- Indian rupee was a popular carry‑trade currency during periods of low domestic rates. With the RBI’s hikes and the Fed’s higher rates, carry‑trade positions have been unwound. Singhvi notes that this sudden outflow can create a feedback loop, exacerbating the rupee’s fall.

Capital Flight Risk
- As global risk aversion spikes, investors move capital to “safe‑haven” currencies such as the dollar and the euro. This shift also reduces demand for the rupee. The article points to “Bloomberg Treasury & Forex” data for recent capital outflows.

FX Market Liquidity
- Low liquidity in the offshore INR market makes the currency more susceptible to sharp swings. Singhvi cites the “FXIMB – India Spot Market Report” to illustrate the bid‑ask spreads widening during the recent depreciation.

5. What’s Next? Outlook and Policy Recommendations

RBI’s Dual Mandate
- Singhvi stresses that the RBI must balance its mandate of price stability with the need to keep the rupee stable. He suggests that the central bank might consider a “rate‑adjusted” policy that gradually normalises the repo rate while providing forward guidance to ease market uncertainty.

Fiscal Discipline
- On the fiscal side, tightening the fiscal deficit to 5 % of GDP by FY 2025‑26 is highlighted as essential. The article links to the Ministry of Finance’s “Budget 2025” proposal for detailed fiscal plans.

Structural Reforms
- Singhvi calls for deeper structural reforms in the manufacturing and service sectors to boost exports, thereby reducing the CAD. He cites the “India Competitiveness Index” to illustrate potential gains.

Monitoring External Shocks
- The article advises keeping an eye on OPEC+ policy changes, global inflation trends, and U.S. monetary policy shifts. A sudden change in any of these variables could trigger another rupee sell‑off.

Quick Takeaway

• Trade‑Deficit & Fiscal Concerns: The rupee’s weakness is rooted in India’s external account, where imports exceed exports, and fiscal deficits are still large.
• Global Drivers: U.S. rate hikes and higher oil prices push capital out of India.
• Domestic Pressures: Inflationary concerns and a slower growth outlook dampen investor confidence.
• Market Mechanics: Carry‑trade unwinding and low liquidity amplify volatility.

Anil Singhvi’s analysis on Zeebiz offers a balanced view, warning that the rupee will likely continue to face headwinds unless India can strengthen its fundamentals and improve policy transparency. For traders, policymakers, and investors, the key takeaway is to stay vigilant to both domestic economic data and global monetary developments that jointly shape the rupee’s trajectory.