Rupee Plummets Historically Against Dollar: The Worries & RBI Monetary Policy Review

The Indian rupee, in its spree of continuous falls, has gone down further, reaching a historical low of slightly over 87 against the US dollar. This has created concerns regarding the state of the economy and the probable impact on it. However, all eyes are now on the RBI (Reserve Bank of India), with the apex bank set to publish its monetary policy review later this week (likely by February 7).

Right after Donald Trump took charge as the US president, he imposed tariffs on Canada, Mexico, and China, which contributed to the surging of the dollar index by over 1%. Trump's moves are also feared to be potential elements of a global trade war. Whether a full-fledged trade war will really materialize remains to be seen, but at this moment, the US dollar value is rising, and worryingly, the Indian rupee is declining.

Why is the Rupee Falling?

In a nutshell, two aspects can be attributed primarily to the rupee's decline: the first is Trump's policy, and the second is the FII (Foreign Institutional Investment) selling.

The rise of the dollar index by 1.24 percent to trade at 109.84, which is a measure of the US dollar’s value relative to six major foreign currencies, resulted in the decline of the Indian currency, which closed at 87.19 on Monday, the first trading day after the Budget was presented. This marked a drop of 55 paise from its previous value of 86.62 against the US dollar.

Donald Trump decided to impose a tariff of 25 percent on all imports from Canada and Mexico, which has become a reality. In response, Canada and Mexico have also issued similar measures against imports from the US. Notably, the export value of Canada and Mexico to the US would be around $840 billion. For China, the tariff imposed is 10% on about $400 billion worth of goods the country exports to the US.

The rupee is not alone in suffering the brunt of Trump's policy; the Chinese Yuan has also weakened. However, the Indian rupee is witnessing collateral damage.

In this context, some analysts argue that the decline of the rupee to 87 against the US dollar is not devastating if we consider only the global factors.

Foreign institutional investment (FII) has not been on a positive track as far as Indian finance is concerned. Since October last year, FIIs have continued selling. As per reports, Rs 1,327 crore worth of equities have been sold by FIIs post-budget.

Again, a net sale of $11 billion by FIIs during the third quarter of fiscal year 2025 has impacted the Indian rupee negatively. In addition, the trade deficit (when a country imports more than it exports) is widening. As per a report, the trade deficit has reached $188 billion in the current fiscal year, which is expected to increase further. All these factors have put pressure on the Indian currency. The rupee has depreciated by 3.6 percent in the past 10 months.

Experts have said that FIIs may continue with the selling spree until the Indian rupee stabilizes. Once the rupee stabilizes, FIIs may see a significant rise.

Impacts: Positive and Negative

The plummeting rupee will have both positive and negative impacts. On the positive side, a weaker rupee will benefit Indians living abroad. The value of foreign currencies will bring more rupees into India.
Additionally, a weaker rupee will enhance export earnings from the global market. This is especially true for sectors like IT.

On the negative side, a weaker rupee will make imports costlier. Crude oil will become particularly expensive. This, in turn, may lead to an increase in production costs. Imported inflation is already consistently rising. This scenario will present challenges for Indian companies that have foreign debt. A weakening rupee is also likely to lead to a decline in foreign direct investment (FDI), according to experts.

Lowering the Repo Rate by RBI?

The monetary policy review of the RBI is likely to be released this week, and this will make things clearer for the future course of action. A meeting of the six-member Monetary Policy Committee (MPC) of the RBI is scheduled from February 5 to 7.

There is growing speculation that the RBI might cut the repo rate (the interest rate at which the RBI lends to other banks). If this happens, it would be the first time in the past five years, as it was last done in 2020 during the pandemic. Lowering the repo rate is considered a way to ease borrowing, which can help economic growth.

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