First, the exchange rate of 100 rupees to the dollar is an important psychological barrier: as the rate approaches 100, there is a sense that the rupee as a currency has collapsed. That’s just irrational.
To see why, consider past trends. In April 2008, the rupee was valued at around 40 to the dollar. In July 2014, some six years later, it was valued at 60-50% depreciation. More than a decade later, another 50% depreciation – which would push the rupee to 90 – is looming. Thus, the depreciation of the rupee has been steady and trending rather than sudden and chaotic.
Second, India’s economy is in decent health, with no obvious trigger for the sharp depreciation. Past episodes of rupee weakness have usually been caused by economic problems, both domestic and foreign. In 2009, the rupee depreciated by more than 10% as the global financial crisis threatened growth and led to an outflow of foreign capital from emerging markets. The years 2012 and 2013 witnessed low growth, high inflation, high fiscal and trade deficits and India being labeled as one of the “Fragile Five” nations.
More recent episodes of rupee erosion have largely been driven by external developments. In 2022, the rupee was dragged down by a strengthening dollar and a sharp increase in US interest rates, along with the added uncertainty of the Russia-Ukraine war. This trend continued in 2023 as conflict in the Middle East added to global uncertainty.
Macroeconomic stability
After emerging from the covid-19 pandemic and into an external environment full of uncertainty, India has managed to maintain stable economic fundamentals. The two macro indicators that plagued India in 2013 – the fiscal deficit and inflation – are well under control.
The central government’s fiscal deficit, which rose to 9.2% of gross domestic product (GDP) in 2020-21 thanks to pandemic mitigation measures, is now below 4.5% of GDP, largely thanks to better tax collection. Inflation, as measured by the Consumer Price Index, was above the RBI’s tolerance level of 6% year-on-year for most of 2022-23 and was above the 4% target in 2023-24, but has since fallen to levels below 4%. The current account deficit is expected to be below 1% of GDP in 2025-26, which is remarkably low for an oil-importing country like India.
There is currently a cycle of interest rate cuts. The reference repo rate was reduced by 1 percentage point this year. Along with monetary easing, the government also eased fiscal policy. Income tax cuts and across-the-board reductions in the Goods and Services Tax (GST) are expected to boost the purchasing power and consumption of ordinary households.
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The across-the-board reduction in GST is expected to boost consumption by ordinary households. (artificial intelligence Gemini)
The economy grew by 6.5% in 2024-25 and by 7.8% during the April-June 2025 quarter. India’s growth performance and policy support measures have not gone unnoticed. Three rating agencies have upgraded India’s sovereign ratings this year, most notably S&P, which raised India from BBB minus to BBB within days of Trump’s punitive tariff announcement. And the International Monetary Fund (IMF) raised India’s growth forecast for 2025 from 6.4% to 6.6%.
Clearly, our macroeconomic scorecard is stellar. India is among the best all-round emerging markets this year, a fact that is often mentioned in the media and in official briefings. That is why the decline in the rupee is puzzling.
Currency calculation
Not only did the rupee weaken, but to add insult to injury, this happened when the dollar itself weakened considerably. Between January and October, the DXY dollar index fell 10%, while the rupee fell 2.5%. In contrast, some emerging market currencies – such as the Vietnamese dong, the Brazilian real and the Mexican peso – have appreciated in value.
So why has the rupee lost ground despite sound economic fundamentals?
The rupee to dollar exchange rate is inherently dependent on the actual and expected demand and supply of dollars in the forex markets. Certainly, economic factors play a role, but only through their impact on the supply and demand for the dollar. If demand for dollars is greater than supply, the rupee is likely to weaken against the dollar. If the supply of dollars is greater than the demand, the rupee is likely to strengthen against the dollar. That’s the basic theory.
Between January and October, the DXY dollar index fell 10%, while the rupee fell 2.5%. In contrast, some emerging market currencies appreciated.
However, real-world exchange rate determination is much more complex, as future demand and supply must be estimated based on currently available information. The more uncertain the current situation, the more difficult it is to accurately estimate future conditions. With the extreme uncertainty facing the world today, it is natural for markets to be risk averse and take a cautious, even pessimistic view of the rupee.
Consider India’s Balance of International Payments (BoP), which is a record of India’s transactions with the rest of the world. The BoP consists of the current account (exports, imports, remittances) and the capital account (flows of foreign capital through debt, equity and aid). Historically, India has run a current account deficit because its imports are higher than its exports, meaning it owes dollars to the rest of the world. In the past, this shortfall was offset by a capital account surplus resulting from net inflows of foreign direct investment (FDI) and foreign portfolio investment (FPI). Simply put, excess capital flows financed the current account deficit.
Past episodes of sharp rupee depreciation have often been associated with widening current account deficits, with the rupee weakening on concerns that capital inflows will be insufficient to finance the deficit (2013, 2018). This year, however, the situation has reversed: despite a low current account deficit; the rupee is being dragged down by a decline in foreign capital inflows. Between April 1 and October 20, 2025, foreign portfolio investors pulled $1.3 billion from India’s capital markets. This is not unusual: FPI flows have turned net negative before, either due to risk reassessments (2008-09, 2019-20) or in response to a stronger dollar (2021-22, 2022-23).
What is new this time is the increase in outward FDI from India. In 2019-20, FDI from India was about USD 12.9 billion and FDI into India was USD 43.3 billion. In 2024-25, FDI outflows from India more than doubled to $28.1 billion (largely due to repatriation of profits), while inward FDI fell to $29.1 billion. As a result, net FDI in 2024-25 was just $959 million. This is worrisome because India has not seen FDI worth less than $1 billion in any year since 1993-94.
Limitations and Warranties
Foreign capital flows have decreased. On the other hand, the ongoing tariff tension threatens Indian exports. A recent report from Crisil shows that exports of goods bound for the US fell 11% in September despite leading shipments (Crisil First Cut, October 2025).
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Persistent tariff tensions threaten Indian exports.
Services exports – which are almost half of India’s total exports – have not yet been targeted. But given the unpredictability of tariff announcements and the Trump administration’s emphasis on “make in America,” the current framework for outsourcing to India cannot be taken for granted.
The impact goes beyond business. The imposition of a large one-time fee for fresh H1B visas and stricter rules for non-immigrant visas suggest that it may become more difficult to live and work in the US. This is important as the US was the largest source of remittances, accounting for 27.7% of remittances flowing to India in 2023-24. Remittances are a major contributor to dollar inflows ($124 billion in 2024-25) and a decline in remittance flows would be a major blow to the current account.
A thinning capital account cushion and a current account exposed to tariff headwinds dented market sentiment against the rupee.
The government is working on damage control. For example, a trade agreement with the United Kingdom was signed in July, trade negotiations are underway with several countries, and export geographies outside the US are being actively explored. However, these strategies will bring results only in the long term. In the short term, the prevailing atmosphere of uncertainty hurt the rupee.
So could bear market sentiment drag the rupee down to 100 per dollar? The answer is yes and no. Yes, because even without tariff threats, at a 3% annual rate of depreciation, the exchange rate would reach 100 in less than five years. But no, it’s unlikely to hit 100 quickly unless something drastic happens, like a complete breakdown of US-India trade talks, an irreversible escalation of tariffs, or the outbreak of conflict or war.
Barring these contingencies, recent policy measures to encourage foreign capital inflows are likely to stabilize the rupee. Of these, three measures stand out for their potential to strengthen the capital account.
Could Bearish Market Sentiment Take Rupee Up To 100 Per Dollar? The answer is yes and no.
First, the RBI has released a draft framework for liberalization of external commercial borrowing (ECB) norms, which, if implemented, will be a sweeping reform that will boost dollar inflows through the ECB. Second, the authorities have adopted a more lenient stance on allowing foreign direct investment in banking. In this fiscal year alone, SMBC acquired 24.9% in Yes Bank, Emirates NBD agreed to take a 60% stake in RBL Bank and Abu Dhabi-based Avenir Investment RSC agreed to take a 43.46% stake in Sammaan Capital. These deals could open up the banking sector to foreign investment in a big way.
Third, the government and the RBI are working together to facilitate greater use of the rupee in international trade and settlement; higher international usage will strengthen the rupee. For example, India and the United Arab Emirates signed an agreement in August to facilitate the settlement of bilateral trade in Indian rupees.
Perhaps the more appropriate question is not whether the rupee will reach 100, but what if it reaches 100. A weaker currency is not necessarily a bad thing. A weaker rupee will offset the price impact of tariffs and keep export prices competitive. In the meantime, the best option is to continue with domestic reforms that support sustainable growth. Robust economic growth is the strongest incentive for foreign capital and the biggest currency support.
