USD/INR Touches Uncharted Territory: How Multiple Quarter Pressures Are Reshaping India's Currency Market

The Perfect Storm: Capital Flight and Fiscal Headwinds Amplify Rupee Weakness

India’s currency continues to face unprecedented depreciation pressure, with the USD/INR pair breaching fresh record levels near 90.30 as of Wednesday’s opening session. This represents the third consecutive trading day of losses for the Rupee against the Dollar. The convergence of two major structural headwinds—persistent foreign capital withdrawal and widening fiscal imbalances—has created a challenging environment for India’s foreign exchange reserves.

The exodus of foreign money has become particularly acute in December’s opening sessions. Foreign Institutional Investors have collectively liquidated equity positions worth Rs. 4,813.61 crore during Monday and Tuesday alone. This selling pressure extends a five-month trend of net outflows, signaling sustained hesitation from overseas portfolio managers about Indian equity valuations. The deterioration in quarterly capital flows tells a stark story: in the third quarter, net inflows collapsed to just $0.6 billion, a dramatic reversal from the $8 billion recorded in the preceding quarter—a shift that underscores how rapidly investor sentiment can shift within a single quarter to another.

India’s external position has been further strained by higher import tariffs imposed by the United States, which has widened the Balance of Payments deficit. This combination of portfolio outflows and trade imbalances represents a structural drag on the Rupee that extends beyond typical currency trading dynamics.

The Dollar’s Paradox: Global Weakness Amid US Political Uncertainty

Interestingly, the Indian Rupee’s struggle against the US Dollar occurs even as the Dollar itself retreats broadly across international markets. The US Dollar Index, which measures the Greenback’s performance against six major currencies, trades approximately 0.12% lower at 99.20 levels, hovering just above its monthly floor of 99.00.

This apparent disconnect reflects mounting speculation about potential shifts in Federal Reserve leadership. White House Economic Adviser Kevin Hassett has emerged as a leading contender to assume the Fed chairmanship following Jerome Powell’s tenure conclusion scheduled for May 2026. During recent remarks at a White House gathering, US President Trump explicitly referenced Hassett as a “potential” candidate while describing him as “a respected person.”

Market participants have grown concerned about the implications of such a leadership transition. Should Hassett assume the Fed’s helm, questions would inevitably arise regarding institutional independence and whether monetary policy decisions might lean towards supporting the Trump administration’s economic objectives. Recall that Trump has previously expressed dissatisfaction with Powell’s restrictive policy stance, arguing that inflation pressures warranted more accommodative monetary conditions.

If Hassett were selected, his policy inclinations—potentially aligned with administration priorities—could exert downward pressure on US Dollar valuations going forward.

India’s Monetary Crossroads: The RBI Policy Decision Looms

Against this backdrop of external volatility, all eyes now turn to the Reserve Bank of India’s scheduled monetary policy announcement this Friday. Market consensus anticipates a 25 basis point reduction in the Repo Rate, bringing it to 5.25%. This expectation reflects India’s inflation trajectory, which has remained comfortably below the central bank’s 2%-6% tolerance band throughout recent months.

Such a policy adjustment, while potentially supportive of growth, could further widen the interest rate differential between Indian and US assets—a development that typically weighs on the currency by reducing the appeal of Rupee-denominated investments to international capital seekers.

Technical Positioning: Overbought Conditions Signal Consolidation Risk

From a charting perspective, USD/INR trades at 90.2145 in Wednesday’s opening, having refreshed previous records. The 20-day Exponential Moving Average continues its upward trajectory, with price action maintaining position above this key indicator—a development reinforcing bullish momentum in the short-term timeframe.

However, the Relative Strength Index (RSI) has climbed to 72.86, indicating overbought conditions. Historically, such elevated momentum readings often precede consolidation phases before subsequent directional moves. The accelerating slope of the 20-day EMA suggests buyers maintain near-term control, with pullbacks likely to find support at this average level positioned at 89.2748.

Critical levels ahead include a potential break below the 20-day EMA on a daily close, which would signal easing upward pressure. Conversely, sustained trading above this threshold reinforces a bias toward additional appreciation for the Dollar against the Rupee.

Understanding the Rupee’s Vulnerability: Key Structural Factors

The Indian Rupee occupies a unique position among global currencies due to its sensitivity to external variables. Several mechanisms drive this sensitivity:

Commodity Dependency: India’s substantial reliance on imported petroleum products means crude oil pricing directly influences the nation’s external balance and currency dynamics. Oil price spikes necessitate greater Dollar spending, creating Rupee depreciation pressure.

Dollar Centrality: Since international trade predominantly occurs in US Dollar denominations, the greenback’s movement against other currencies inherently impacts India’s cross-border commerce pricing and competitiveness.

Capital Flow Dynamics: Foreign investment—both direct and portfolio-based—represents a critical source of forex inflows. When international investors reduce exposure to Indian assets, the subsequent capital withdrawal compresses demand for Rupees while increasing supply.

RBI’s Operational Framework: The Reserve Bank actively manages exchange rates through direct forex market intervention, supplemented by interest rate policy adjustments. Higher interest rates typically attract international capital seeking attractive Rupee-denominated returns, supporting currency strength through the carry trade mechanism.

Macroeconomic Interconnections: Several broader economic indicators influence Rupee valuations—inflation relative to trading partners, real interest rate differentials, GDP growth momentum, trade balance composition, and the overall risk appetite climate. Strong economic growth typically attracts foreign investment, bolstering the Rupee. Conversely, elevated inflation, particularly if exceeding peer nations’ rates, acts as a currency headwind by reflecting domestic devaluation and raising export costs.

The interplay between these factors—especially when multiple pressures align as they currently have—explains why the Rupee faces such formidable depreciation challenges at present.

Upcoming Data on the Docket: Market participants await November’s ADP Employment Change and ISM Services PMI figures, both due during North American trading hours. Economists forecast private sector job additions of approximately 10,000 workers—substantially below October’s 42,000—while the Services PMI is anticipated to ease to 52.1 from 52.4.