New Delhi Dec 12: The Indian rupee has slid to a historic low against the US dollar, with a real effective depreciation of around 9%, making it one of the worst-performing major currencies this year and raising fresh concerns over growth, inflation, and external stability.
According to BofA Securities, the rupee has weakened about 4.7% against the dollar in 2025 and over 5.8% in the past year, but the fall is steeper in Real Effective Exchange Rate (REER) terms, with an estimated 8.6% slide year-to-date and roughly 12.1% over one year, putting this episode in the same league as past stress years like 2008, 2013 and 2018. Weakened capital flows—across FDI, FPI and debt—rather than a runaway current account deficit are seen as the main driver, with the RBI having sold around 65 billion dollars in the spot market and holding a large short forward dollar position to smooth volatility.
BofA’s analysis says the sharp depreciation is hitting the economy through five channels: denting sentiment (consumer and business confidence, PMIs), altering GDP dynamics via import compression and some export support, adding limited but not yet alarming inflation risk, gradually improving the trade and services balance, and producing a mixed impact on the fiscal position as higher import costs are partly offset by larger RBI forex-related dividends. Studies cited in the report suggest that a 5% REER fall can cut imports by about 2.3% and lift exports by around 2%, with the current bout of weakness potentially improving the trade balance by 5–7%, saving an estimated 7–12 billion dollars over time, mainly through lower import volumes rather than a sudden export boom.
On inflation, the traditional “weak rupee–higher prices” spiral appears muted so far thanks to softer global commodity and crude prices, negative wholesale inflation and easing input costs, though model estimates still flag a possible 60–70 basis points upside risk if the weakness persists. BofA notes that about a third of India’s CPI basket is directly or indirectly import-linked, but robust rabi prospects and benign food trends could help absorb some cost pressures, while the government’s stance on keeping retail fuel prices relatively high limits the need for fresh pump hikes even with a weaker currency.
In the external sector, analysts expect the current account deficit to narrow with a lag as goods and especially services exports gain competitiveness, remittances rise after the depreciation wave stabilises, and discretionary outbound spends like tourism soften, although weak US and global trade could delay the classic “J-curve” improvement. On the fiscal side, higher fertiliser and some LPG subsidy outgo could be offset by stronger RBI surplus transfers driven by active forex operations, making the net budget impact uncertain but manageable in the near term.
Looking ahead, BofA sees the rupee’s trajectory hinging on resolution of the India–US trade deal, the return of portfolio flows and global dollar trends, with RBI expected to stay active in both spot and forwards to curb excessive volatility rather than defend any fixed level; its base case is for the rupee to recover modestly and move towards about 86 per dollar by end-2026 if the dollar weakens globally and Indian growth momentum holds up.
