Rupee at an All‑Time Low: How USD/INR Really Works and What 2025 Taught Us
In 2025, the Indian rupee didn’t just weaken – it ended up as Asia’s worst‑performing major currency, slipping past the crucial 90‑per‑dollar mark and printing fresh all‑time lows around 90–91. Headlines screamed about record lows, foreign investors sold Indian assets, and social media filled with hot takes blaming everything from “weak policy” to “global conspiracies”. But behind the noise, there is a very clear story about how currencies work, why the dollar dominates, what changed in RBI’s playbook, and why 2025 became a perfect storm for the rupee.
This insight breaks that story into three parts:
The mechanics: how USD/INR is actually determined.
The 2025 shock: what specifically went wrong this year.
The implications: what this means for traders, investors, and the Indian economy.
1. What does it mean when “the rupee is falling”?
When people say “rupee gir gaya” or “dollar badh gaya”, they’re talking about the exchange rate, not the paper note in your wallet. If 1 USD moved from 85 INR in January 2025 to about 90 INR by December 2025, the rupee has depreciated and the dollar has appreciated. You now need more rupees to buy the same dollar.
Currencies, unlike land or factories, don’t produce anything on their own. Their value is purely relative: what can this currency be exchanged for – goods, services, or other currencies. For the rupee, the key relative benchmark is the US dollar, because that is the currency in which most global trade, commodities, and cross‑border finance are denominated.
At its core, the USD/INR rate is just a price, and like any price, it is driven by demand and supply:
When the demand for dollars rises or
The supply of dollars available in India falls,
the dollar becomes more expensive in rupee terms – USD/INR goes up and the rupee “falls”.
Everything that happened in 2025 – tariffs, FPI outflows, RBI’s stance, oil, gold – ultimately feeds into this demand–supply game for dollars.
2. How is USD/INR set? Peg, free float and India’s “managed” approach
Pegged regime
In a pegged system, the central bank effectively declares: “1 USD = X INR, and we will keep it there.” Market forces don’t directly decide the level; the central bank does, by constantly buying or selling currencies to defend the peg.
Example: Nepal pegs the Nepali rupee to the Indian rupee. Some small economies peg to the US dollar.
Free float
In a pure float, the central bank does not target any specific level; the rate is simply the result of market demand and supply.
Many major currency pairs, such as USD/EUR or USD/JPY, operate close to this model.
Managed float (India)
India sits in the middle. Since the 1990s, the rupee has been broadly market‑determined, but the Reserve Bank of India (RBI) steps in to smooth volatility, not to fix the rate.
1950–1991: the rupee was effectively pegged; RBI announced a daily rate and the market used it.
Post‑1991: liberalisation pushed India towards a “managed float” – the market sets the trend, RBI leans against sharp, disruptive moves.
In practice, RBI uses two key tools for this:
Spot intervention – buying or selling dollars from its reserves.
Forwards and swaps – adjusting the timing of dollar flows without always moving spot immediately.
This distinction becomes crucial in 2023–25, when the pattern of RBI’s behaviour changes.
3. RBI’s 2023–25 pivot: from tight band to “crawl‑like” regime
Through 2023 and much of 2024, RBI appeared to be following an informal band‑defence strategy. When USD/INR tried to move much beyond levels like 83–84, the central bank heavily sold dollars, drawing down reserves and taking large short‑dollar forward positions to contain volatility. The goal was simple: keep the rupee stable, signal confidence, and buy time in a world of high US interest rates.
By late 2025, that playbook hit its limits:
Over previous bouts of defence, RBI had already used up tens of billions of dollars of effective firepower, combining spot depletion with forward commitments.
Economists and dealers observed that RBI’s intervention intensity fell as USD/INR moved towards 90, with the central bank allowing the rupee to break above earlier “lines in the sand”.
This is very similar to what calls a “crawl‑like mechanism”: RBI lets the rupee drift with fundamentals, intervening selectively to avoid a free fall but no longer aggressively defending a tight range like 84–87.
The logic is harsh but rational:
Forex reserves are not just for smoothing USD/INR; they are national emergency buffers – for banking stress, external repayment pressure, commodity shocks, or even pandemics.
Burning too many dollars just to keep the rupee “looking good” would leave India vulnerable to a true crisis later.
So in 2025, when fresh shocks hit, RBI’s choice was: accept a weaker rupee now, retain enough ammunition for genuine distress. The market saw that shift – and repriced USD/INR sharply higher.
4. Why 2025 became a perfect storm for the rupee
The “why now?” question for 2025 has four big answers: tariffs, trade deal limbo, capital outflows, and India’s structural import dependence.
4.1 Trump 2.0, tariffs, and the India–US trade overhang
The return of Donald Trump to the White House brought back a familiar tool: tariffs. In 2025, the US administration imposed sharp duties on a range of imports, including key Indian product lines, with incidence on some items going as high as 50%.
For India, the US is the single biggest export market. Tariffs hit in two ways:
They make Indian goods less competitive versus Vietnam, Mexico, or other suppliers for commoditised products like textiles, basic agro commodities, and low‑value manufacturing.
They inject uncertainty into the much‑discussed India–US trade deal, which had been touted as a path to substantially raise Indian exports to the US by 2030.
The simple mango example: in theory, when INR weakens from 90 to 100 per dollar, a US buyer’s 1 dollar converts into more rupees, allowing them to buy more Indian mangoes for the same dollar. That should boost exports. But if Washington adds a big tariff, the benefit of the cheaper rupee gets swallowed by the tax wall. That’s exactly what 2025 looks like: depreciation without the usual export windfall.
4.2 Capital outflows: FPI selling and FDI repatriation
Macro headlines this year show one constant: foreign portfolio investors (FPIs) were net sellers of Indian equities and debt, especially whenever the US dollar index strengthened or new tariff news dropped. Some foreign direct investment (FDI) also saw repatriation flows as companies took profits or adjusted exposure.
Every exit by foreign investors creates dollar demand:
They sell Indian assets, receive rupees, and then need dollars to take money out.
Banks or RBI must supply those dollars, putting pressure on the exchange rate.
2025 combined this with weaker inbound flows because global investors were wary of:
Tariff uncertainty.
Delayed or diluted trade deals.
A sense that India was entering a more volatile macro phase, even though its growth remained relatively robust.
4.3 Trade deficit, oil, and gold
India is structurally a net importer of goods, especially energy and gold.
India imports around 88–89% of its crude oil needs, and oil plus related products account for a very large dollar bill each year.
High global prices plus a weak rupee magnify that bill in rupee terms, widening the trade deficit.
Gold imports also remain elevated as households treat gold as a hedge and store of value – but those imports do not directly create future export income.
Date‑wise, 2025 saw some of the largest monthly trade deficits in recent years, with merchandise gaps exceeding 40 billion dollars in some months as exports slowed and imports stayed strong. That directly means:
more structural demand for dollars (to pay for imports),
less structural supply (because exports were not firing),
which is exactly the environment in which a currency tends to underperform peers.
4.4 The global dollar cycle and EM risk
Overlay all of this with a strong US dollar. With US growth and yields relatively high and geopolitical risk elevated, global investors piled into the dollar for safety. Many emerging‑market currencies suffered in 2025, but India looked worse than most because it had country‑specific negatives on top of the global cycle – tariffs, deal uncertainty, big FPI outflows, and RBI’s shift to less active defence.
That’s how the rupee ended up labeled “Asia’s worst‑performing currency of 2025”, even though the underlying growth story remained relatively strong.
5. Why rupee depreciation is not a “party” for India
It’s tempting to think: “Rupee girta hai toh exporters jeet jaate hain – good for the economy, no?” The persistent depreciation comes with a cost, and for India that cost is high.
5.1 External debt becomes heavier
India’s total external debt is in the hundreds of billions of dollars. A large part of that is denominated directly in foreign currency. When the rupee depreciates:
The rupee cost of servicing the same dollar obligations rises, even if the dollar interest rate stays flat.
The video illustrates this with an approximate figure: a modest annual rupee depreciation mechanically raises India’s interest outgo on its external debt, tightening the fiscal space over time.
From a macro lens: if you keep letting the currency slide faster than your income grows, your debt burden in local terms creeps up.
5.2 Oil‑fuelled inflation and living costs
Because India depends so heavily on imported crude, a weaker rupee instantly translates into a more expensive oil bill.
Oil companies either absorb some pain in margins or pass it on via higher pump prices for petrol and diesel.
Once fuel goes up, almost everything eventually becomes more expensive because transport, logistics, and energy costs bleed into the entire price chain.
The video points out a simple causal chain: dollar up → crude costlier in rupees → petrol/diesel dearer or margins squeezed → economy‑wide inflation pressure builds. For households, that means less real disposable income; for policymakers, it means harder trade‑offs between growth and inflation.
5.3 Why exporters didn’t fully benefit in 2025
Textbook economics says: weaker currency = more competitive exports = good for exporters. The mango example in the session makes the point: 1 USD buying more rupees should let a foreign buyer buy more Indian goods.
But in 2025:
Tariffs and trade barriers blocked that advantage.
For commoditised goods – towels, basic textiles, generic agro items – a foreign buyer can easily switch from India to Vietnam or Mexico if tariff‑adjusted prices make India unattractive.
Exporters reported weaker order books despite the cheaper rupee, because the policy wall mattered more than the FX tailwind.
So the theoretical “export party” didn’t show up; the rupee fell, but exporters didn’t see matching volume gains.
6. Dollar dominance: why everyone still wants USD, not INR
A final piece of the puzzle is why the dollar sits at the centre of all this. Take walk through the history: trade once settled in physical gold, which became impractical as global commerce exploded. Eventually, countries converged on the US dollar as the primary medium for international trade and reserves because the US was the richest and most powerful economy, and key institutions like the IMF and World Bank were dollar‑centric.
The implications in 2025 are very real:
India’s trade with most partners is in dollars, not rupees: oil from the Middle East or Russia, machinery from Europe, electronics from East Asia – all priced and settled largely in USD.
Experiments like paying Russia in rupees for oil exposed the problem: Russia accumulates rupees it can’t easily spend with other partners, so those rupees just sit in Indian banks.
Result: everyone, ultimately, still wants dollars – and that structural demand gives USD its resilience in times of stress.
For USD/INR traders and macro investors, this is why “de‑dollarisation” themes so far haven’t really loosened the dollar’s grip on real flows.
7. What this means for traders and long‑term investors
For Stocker users – traders, investors, and macro‑curious readers – the 2025 rupee story isn’t just an academic case study. It affects portfolio decisions, hedging strategies, and how you interpret Indian assets.
7.1 For traders and hedgers
Volatility clusters around events: tariff announcements, trade‑deal headlines, RBI policy commentary, and US data days have all coincided with sharp USD/INR intraday moves in 2025.
Hedging is unavoidable if you have dollar liabilities (importers) or dollar receivables (exporters). But hedging itself creates baseline dollar demand – reinforcing the market’s structural bid for USD.
The shift to a “crawl‑like” regime means you should not expect RBI to always “save” levels like 87 or 88; technicals and global flows matter more now than in earlier tightly‑managed phases.
7.2 For long‑term investors
Historically, emerging‑market currencies tend to trend weaker versus the dollar over long periods, because EMs run higher inflation and need competitive exchange rates to support growth.
That doesn’t mean the rupee is doomed, but it does mean dollar‑based investors should think in real, FX‑adjusted returns, not just rupee nominal returns.
India’s Real Effective Exchange Rate (REER) has slipped below 100, suggesting that, on a trade‑weighted basis, the rupee is already more competitive than a few years ago. If structural reforms and credible trade deals land, this could create a medium‑term sweet spot of competitive currency plus improving fundamentals.
8. Where does the rupee go from here?
No one can forecast exact levels, but a few directional points stand out:
Without a credible India–US trade framework and more stable FPI flows, pressure on the rupee is likely to persist, especially around global risk‑off phases.
Structural fixes – improving export capacity, diversifying energy sources, reducing gold obsession, strengthening domestic capital markets – matter more for the rupee than day‑to‑day headlines.
For an emerging economy with higher trend growth and inflation than the US, some depreciation over the long run is normal, but sharp overshoots (like 2025) are the result of policy, external shocks, and how the central bank chooses to respond.
For now, 2025 will likely be remembered as the year India’s currency pain met its politics and policy in full public view – a live case study in how global power, trade wars, capital flows, and central bank strategy all intersect in a single number: USD/INR.
