India's Currency Dynamics and Economic Outlook
The Indian rupee slipped below the critical 90-per-dollar mark, raising concerns about the macroeconomic landscape. Despite supportive macroeconomic factors such as softened crude oil prices and a surprising 8.2% GDP growth in the September quarter, the rupee remains under pressure due to several factors.
Factors Affecting the Rupee
- Persistent Dollar Outflows: Foreign portfolio investors are booking profits and reallocating to more attractive markets, draining liquidity and increasing demand for the dollar.
- Trade Uncertainty: Delays in finalizing a trade deal with the United States have injected uncertainty into India’s external position, affecting future trade flows and competitiveness.
- Gold Imports: A significant increase in gold imports during the festive season has added pressure on the rupee.
Trade Deficit Concerns
India’s trade deficit is under strain with a sharp drop in exports, particularly to the US. Merchandise exports contracted by 11.8% year-on-year in October 2025. The weakness was broad-based:
- Oil exports fell by 10.5%.
- Non-oil exports shrank by 12%.
- Major export categories like engineering goods, gems and jewellery, and chemicals saw significant declines.
Import Trends
- Merchandise Imports: Increased by 16.6% year-on-year to a record $76.1 billion.
- Gold Imports Surge: Tripled to $14.7 billion, driven by festive buying and rising gold prices.
- Non-oil, Non-gold Imports: Rose by 12.4%, driven by demand for silver, electronic goods, and machinery.
RBI's Stance and Market Responses
The Reserve Bank of India (RBI) appears to favour gradual depreciation to maintain export competitiveness but has not significantly intervened in the currency market:
- The RBI is perceived as allowing the rupee to weaken to aid exporters.
- It has sold dollars to smooth volatility but not to target a specific exchange rate.
- The RBI's strategy indicates a "soft-touch" approach, conserving its resources for potential disorderly market conditions.
Future Outlook
Several factors will influence the rupee's future trajectory:
- Conclusion of a trade deal with the US.
- Trends in gold imports and global crude oil prices.
- Performance of India’s domestic equity markets.
Chief Economist at Bank of Baroda, suggests the market could see a correction to 88-89 levels post-policy announcement. Overall, the next steps in trade agreements and economic policies will be crucial in determining the stability of the rupee and India's economic outlook.
