Rupee set to weaken further against dollar as RBI's defences thin

of 1.3% of gross domestic product (GDP), India’s capital flows remain weak. Foreign portfolio investors (FPI) have stayed away even as other emerging markets saw inflows, largely because Indian equities haven't corrected enough to offer attractive dollar-adjusted returns, Gupta said.

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So far in 2025, FPIs have withdrawn $16.4 billion from Indian equities, according to data from National Securities Depository Ltd, They had pumped in a net of $124 million in 2024.

The RBI's task has become more complicated because it entered the current financial year with a large net short forward book, reducing its flexibility to sterilize spot-market interventions without tightening rupee liquidity.

After heavy dollar selling in October, which drained ₹1.5 trillion worth of rupee liquidity from the banking system, the central bank has been forced to moderate its direct defence of the currency to avoid choking domestic financial conditions.

Treasury officials believe this is why intraday volatility has risen. “People realised very quickly that there was no RBI at 89.74. Once that level broke, the fall then onwards to 89.50 happened in five minutes,” said a senior dealer at a state-owned bank.