The Indian rupee fell to a record low of 89.78 per $1 on the 1st (local time). Even though India's gross domestic product (GDP) in the third quarter (July–September) posted a surprise gain that beat market expectations, the currency keeps plunging with no bottom in sight.
According to major foreign media including Bloomberg and Reuters on the 2nd, in the international foreign exchange market the previous day, the rupee's exchange rate against the U.S. dollar jumped intraday to 89.78 per dollar (a decline in the rupee's value). It surpassed the low of 89.49 per dollar set on the 21st of last month in just 10 days.
At the start of the year, the rupee transacted around 86.2 per $1. But in 11 months, its value fell 4.2%. During the same period, the value of the won per $1 fell 0.6%, from 1,375 won to 1,470 won.
In economic theory, when a country's growth rate rises, that country's currency value also climbs, as investment pours in and money circulates. According to India's statistics office, third-quarter GDP growth was 8.2%, far above analysts' forecasts. So why is the rupee continuing a free fall?
Experts said the divergence between India's economic growth and the rupee's exchange rate stems from a complex mix of tariff fears from the Trump administration, changes in the Reserve Bank of India's (RBI) exchange-rate response, and structural weaknesses in the economy.
Large-scale foreign capital outflows are the most direct cause of the rupee's plunge. Foreign investors have been net sellers of $16.5 billion (about 23 trillion won) in India's stock market this year. During the same period, about 14.5 trillion won in foreign funds left Korea's stock market, 68% less than in India.
Foreign investors are leaving India's stock market due to uncertainty. The United States is India's largest export market, accounting for 20% of total exports. But the Modi administration now in power is still tugging over tariffs with the United States. U.S. President Donald Trump has threatened to impose "high tariffs of up to 50% on Indian products" as India balances between Russia and the United States.
On top of that, changes in visa policy that could deal a critical blow to the country's flagship export sector, IT services, are another headwind. The IT services industry provides IT-based services such as software development, cloud, cybersecurity, business process outsourcing (BPO), and data analytics. As of last year, India's IT services exports totaled about $204.7 billion (about 280 trillion won).
The H-1B visa is a key channel for Indian IT talent to enter the United States to carry out projects locally or collaborate directly with corporations. If that channel is blocked, IT services exports—which account for 11% of India's total GDP—will inevitably be hit. Bloomberg said, "After the U.S. government said it would raise H-1B (specialty occupation) visa fees from the existing hundreds of dollars to a whopping $100,000 (about 140 million won), foreign investor sentiment has rapidly frozen."
The Reserve Bank of India (RBI) has also taken a different tack on exchange-rate moves since the new governor took office. Under former Governor Shaktikanta Das, the RBI actively defended the currency even by drawing down foreign reserves. By contrast, Governor Sanjay Malhotra, who took over last December, has minimized market intervention.
In a recent interview, Governor Malhotra suggested he has no intention of artificially intervening in the exchange rate, saying, "Given the inflation gap between India and advanced economies, an annual 3%–3.5% depreciation of the rupee is a natural reflection of economic fundamentals."
The International Monetary Fund (IMF) recently reclassified India's exchange-rate regime from "stabilized arrangement" to a "crawl-like (limited fluctuation allowed) regime." That amounts to international recognition that Indian authorities are allowing some degree of exchange-rate movement.
Some also argue that India is deliberately weakening its currency to brace for tariff attacks from the Trump administration. When a country's currency weakens, its export products gain price competitiveness.
Reuters, citing JP Morgan economists, reported, "Given the current macroeconomic environment, an engineered rupee depreciation is not only inevitable but also desirable," adding, "The longer trade talks with the United States are delayed, the more rupee depreciation will help offset the shock to exports."
A weaker rupee can be a boon for export corporations. But it pushes up import prices, directly burdening household finances. Arun Kumar, a professor at Jawaharlal Nehru University (JNU), said in an interview with the Times of India, "Rupee depreciation may be positive for growth figures by boosting exports, but it will trigger inflation and negatively affect the overall economy," adding, "In particular, price increases in energy, fertilizers, and electronics, where import dependence is high, are unavoidable."
For the Indian government and corporations with heavy dollar debt, a rupee crash means their liability burden snowballs. Dhiraj Nim, an FX strategist at ANZ (Australia and New Zealand Banking Group), said, "The Reserve Bank of India will try to conserve foreign reserves as much as possible until trade talks with the United States are fully concluded," adding, "If talks go well, the rupee could return to the 88-per-dollar range, but if not, the Central Bank will consider reentering the market."