Indian Rupee Hits All-Time Low at 85: What Are The Key Drivers Behind This Fall?

The US Federal Reserve’s hawkish stance at its latest meeting has sent shockwaves through global markets, impacting economies like India. It has reduced key interest rate for the third time since the pandemic, and indicated at two more in 2025. This development strengthened the dollar index against the Indian rupee which slipped to a historic low of 85 on Thursday, depreciating from the previous day’s close at 84.96.

The dollar index, which measures the US currency against a basket of six foreign currencies, surged to a two-year high level after the US fed policy decision. The index reached at 108.086, the highest since November 2022. It’s important to mention here that rupee has been depreciating against the US currency due to persistent global and domestic issues.

These factors include outflows from domestic equity market, record high trade deficit, RBI’s intervention in forex market, slow domestic growth, an environment of uncertainty due to re-entry of Donald Trump in America, and more.

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Why Rupee Is At All Time Low?

1) Mounting Trade Deficit: India is facing mounting economic pressures as its trade deficit soared to a record high of $37.8 billion in November, up sharply from $27.1 billion in October. The country’s imports climbed to an unprecedented $70 billion in November, up from $66.3 billion in October when exports slipped to $32.1 billion. This has underscored faltering global demand and heightened trade tensions, placing downward pressure on the rupee.

 “This significant gap, driven by record gold imports and a sharp decline in exports, has brought renewed focus on the Indian rupee and the Reserve Bank of India’s (RBI) strategies to manage the currency’s stability,” said Riya Singh – Research Analyst, Commodities and Currency, Emkay Global.

2) RBI’s Intervention: The central bank has been interveing in foreign exchange (forex) market to moderate the rupee’s depreciation. However, the continuous decline reflects global headwinds and limited domestic buffers. It has also caused concern for the RBI because India’s forex has reduced to over $46 billion.

“Despite RBI’s active intervention, including foreign exchange sales amounting to $36.4 billion since October, the rupee continues to face depreciation risks. This decline reflects both the RBI’s market interventions and valuation effects from a stronger dollar and elevated global yields,” Singh said.

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3) High Capital Outflows: Foreign investors have turned cautious, with net outflows of $532.2 million in debt markets on December 12, the highest since October. This underscores the broader challenges India faces in attracting capital amid global dollar strength and higher US Treasury yields.

“Outflows from from domestic equity markets, and overall strength of USD against the majors on the back of hawkish outlook from US Fed arbitrage opportunities in interims between onshore and offshore rupee market and weakening of Asian currencies particularly Chinese Yuan are all putting pressure on the rupee,” said Kunal Sodhani, AGM (Vice President), Global Trading Centre, FX & Rates Treasury, Shinhan Bank India.

4) Trump Effect: Analysts highlighted that US President-elect Donald Trump's policies pose a risk for emerging market currencies like the Indian rupee. In addition, trade policy changes could disrupt global exports, and the Hawkish fiscal measures could further strengthen dollar.

Read More | Rupee Plummets to All-Time Low of 84.76 Against US Dollar

What's Ahead?

Analysts predict that the rupee’s trajectory remains under strain. While RBI interventions may temper volatility, structural challenges, including twin deficits and weak export performance, persist. Moreover, sustained dollar strength and rising global interest rates add to the rupee’s vulnerability.

"The dollar-rupee pair may break off the resistance level of 85.00, with potential depreciation towards at 85.18 – 85.35. Conversely, a breach below 84.78 could expose support levels near 84.50," said Singh.

The rupee could see further weakness with persistent global uncertainties and domestic challenges.