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Rupee Slides to Record Low as U.S. Trade Deal Stalls

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  Published in Business and Finance on Sunday, December 14th 2025 at 23:19 GMT by moneycontrol.com

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Rupee Weakens to Record Low as US Trade Deal Stalls and Capital Outflows Persist

On a Tuesday morning, the Indian rupee slid past the 84‑rupee mark against the U.S. dollar, marking its weakest level since early 2023 and the lowest point in the market’s recent history. The drop, from roughly ₹83.80 to ₹84.00 per $1, was a clear indicator that global and domestic forces were converging against the currency, driven primarily by uncertainty over a new U.S.–India trade deal and a steady stream of capital leaving the country.

1. The Immediate Catalyst: U.S. Trade Deal in Limbo

The rupee’s slide has been closely linked to the stalled negotiations between the United States and India over a fresh trade agreement. The “Phase‑1” deal that the two countries signed in early 2020, which promised India 100 billion U.S. dollars in tariff‑free imports, has reached an impasse as the Biden administration seeks to re‑evaluate the terms.

The news that the U.S. Department of Commerce has not moved forward on a new deal left many Indian exporters anxious. When a large percentage of India’s trade receipts are dollar‑denominated, the rupee naturally takes a hit as the dollar strengthens. Analysts noted that the lack of a firm trade pact raises concerns about the future of India’s export growth and the stability of the foreign‑exchange market.

2. Persistent Capital Outflows

While the trade deal’s uncertainty is a headline driver, the rupee is also feeling the weight of persistent capital outflows. According to the Reserve Bank of India (RBI), foreign portfolio investments (FPIs) and private placement of foreign exchange (PFOs) have been consistently negative for the past six months. In March, for instance, the RBI recorded a net outflow of approximately $4.5 billion in FPI purchases.

The outflow is not merely a “flight to safety” moment. Indian institutional investors have been gradually shifting their portfolios toward the U.S. dollar and other assets perceived as higher yielding, reflecting concerns over the domestic rate environment. The continued sell‑off of Indian equities has also been contributing to a lower valuation of Indian companies, adding further downward pressure on the rupee.

3. RBI’s Intervention and Policy Stance

The RBI has been on alert, but its reaction has been limited. In early March, the RBI announced a “small” intervention in the foreign‑exchange market, purchasing foreign currency to cushion the rupee’s decline. This move, however, was not enough to stop the trend. The RBI’s policy rate has remained unchanged at 6.50 % since January, and its latest “open‑market operations” did not include any sizeable infusion of foreign currency.

In a recent statement, RBI officials stressed that they were closely monitoring the market environment and were prepared to act if the rupee’s depreciation threatened the broader economic stability. They also highlighted the importance of maintaining sufficient foreign‑exchange reserves – which currently stand at over $560 billion – to act as a buffer.

4. Broader Global Influences

The rupee’s weakness is not a domestic phenomenon alone. Global factors are reinforcing the downward trend:

• U.S. Federal Reserve Hikes: The Fed’s tightening cycle, with multiple rate hikes over the past year, has bolstered the U.S. dollar and pushed investors toward dollar‑denominated assets.
• Risk‑off Sentiment: Amid concerns about a potential U.S. recession and global supply‑chain bottlenecks, risk‑off sentiment has increased, causing capital to shift away from emerging markets.
• U.S.-China Trade Tensions: The ongoing trade friction between the U.S. and China has also weighed on emerging‑market currencies, as investors seek safe havens.
• China’s Policy Moves: China’s own monetary easing, including a cut in its benchmark interest rate, has pressured the yuan, which in turn has had a ripple effect on the rupee.

5. Domestic Factors

India’s domestic economic environment is adding to the pressure:

• Inflationary Pressures: Although the consumer price index (CPI) remains in the 5‑6 % range, rising food and fuel costs have kept inflation high, limiting the RBI’s flexibility to cut rates.
• Fiscal Policy: The government’s fiscal deficit targets, while in line with long‑term sustainability, have also contributed to concerns about long‑term debt sustainability.
• Credit Growth: The slowdown in credit growth, partly due to tighter lending conditions, has dampened domestic investment prospects.

6. Market Reactions and Expert Opinions

Financial analysts have offered mixed forecasts for the rupee:

• Conservative View: Some experts argue that unless the U.S. trade negotiations move forward, the rupee will remain in a weak range, especially if the U.S. dollar continues to strengthen.
• Optimistic View: Others suggest that a potential RBI rate cut or a sudden improvement in the trade talks could trigger a rally for the rupee, at least in the medium term.
• Risk‑Management Advice: Several banks have recommended that investors adopt hedging strategies to mitigate the currency risk associated with the rupee’s volatility.

7. Looking Ahead

The rupee’s record low underscores a confluence of global macro‑economic trends and domestic policy constraints. While the RBI’s interventions have provided a temporary cushion, the currency’s resilience will largely depend on:

1. Clarity on the U.S. Trade Deal: A breakthrough in negotiations could provide a boost for Indian exporters and improve investor sentiment.
2. Global Dollar Strength: Any easing in U.S. monetary policy could lift the rupee by reducing the dollar’s dominance.
3. Domestic Policy Moves: The RBI’s potential to cut rates or adopt more accommodative monetary measures could alleviate the pressure on the rupee.

Until these elements align, the rupee will likely continue to navigate a challenging environment, with capital outflows and external uncertainties remaining significant drag forces. As of the latest data, the rupee stands at approximately ₹84.00 per U.S. dollar, with analysts noting that the currency could stay below the 84‑mark for the foreseeable future if global risk sentiment remains cautious and the U.S. trade negotiations do not yield a favorable outcome for India.