By Dr. Gyan Pathak
Rupee is falling, but Reserve Bank of India did not come to rescue it. No wonder, immediately after the latest announcement of the repo rate cut by RBI by 25 basis points (bps) on December 5s, bringing it down to 5.25 per cent, the rupee weakened further – dropping under Rs90 per US dollar.
Given the global economic environment, external headwinds (trade tensions, capital outflows), and RBI’s easing stance, the rupee is likely to remain under pressure in the near term — unless there is a strong reversal in capital flows, exports, or global conditions. The repo-rate cut adds to that downward pressure, though it may help growth and exports.
After the coupon-cut, the RBI’s governor said the bank’s/Monetary Policy Committee (MPC) approach is to allow the rupee to find its “correct” level and not to target a specific exchange-rate band. They also emphasized that the liquidity-injection tools (forex-swaps or open-market operations) are meant to support domestic credit flow and general liquidity — not specifically to support/defend the rupee. All these mean that the RBI seems to accept some rupee depreciation as part of the trade-offs of easing for growth.
Lower rates tend to put pressure on the rupee. When the Repo Rate is cut, domestic interest rates drop, which makes Indian financial assets — like bonds or fixed deposits — less attractive to foreign investors compared with assets in high-yielding countries. That tends to reduce foreign capital inflows.
Reduced foreign inflows — or even foreign outflows — mean lower demand for INR and higher demand for foreign currency (e.g. USD). That pushes the INR downward (i.e. depreciation/decline against the dollar).In fact, history shows that rate cuts by RBI have often coincided with rupee weakening. Thus, the decision to cut repo rate — all else equal — increases the risk that the rupee will depreciate further.
When immediately after the latest 25 bps repo‐rate cut (bringing repo to 5.25%), the rupee weakened — dropping under Rs 90 per US dollar, several analysts noted that lower Indian interest rates reduce foreign-investor interest in holding rupee-denominated assets, which pressures exchange rate downward.
Additionally, weak global capital inflows, trade imbalances and external pressures (e.g. tariffs, global uncertainty) compound the rupee’s fall — so in the current global context, a repo-cut is especially likely to accelerate rupee weakness.
Nevertheless, it is not all deterministic, since there are several other factors that can influence the rupee-dollar rates. Capital flows and investor sentiment is one of them. If foreign investors (equity or FDI) keep investing, demand for rupee remains high — which can support or even strengthen INR. If exports increase (or imports drop), demand for foreign currency may ease. A weak rupee can help exports become more competitive — potentially improving India’s trade balance. The RBI can also counter volatility or sharp depreciation by using its foreign-exchange reserves or conducting forex operations in future. Global macro environment can also dominate, such as dollar strength, interest rates abroad, global capital flows, and geopolitical risks. So, while a repo-rate cut tends to exert downward pressure on the rupee, the ultimate exchange rate depends on a broader mix of domestic and global factors.
What this means for Indian economy and individuals? Imports will become costlier, that is items priced in foreign currency (fuel, electronics, raw materials, imported goods) get more expensive in rupee terms. This can drive up inflation and hurt consumers. Exports may get a boost because Indian exporters get more rupees per dollar of foreign earnings, which can help export-oriented sectors, manufacturing, etc.
However, there are imported inflation risks, because higher cost of imports can feed into inflation, which could negate part of growth benefit. Cost of foreign-dominated borrowings will rise, because for Indian firms/borrowers with dollar-denominated debt, servicing costs will increase when rupee falls. Additionally, there will be uncertainty for savers and investors, because currency volatility may dampen investor sentiment, affect capital flows, bond yields, foreign investment, etc.
Based on the RBI’s December-2025 monetary policy (repo cut + liquidity easing),external economic conditions, capital flows, and structural factors affecting INR, there can be three possible scenarios or analytical projections not amounting to forecasts over the next 6-12 months.
The Most likely baseline scenario is the INR per dollar will be anything around Rs90.5 – Rs 93.5 by mid-late 2026, as per the most of the analysts. In case of high pressure on INR, that is in pessimistic scenario rupee can fall to Rs 94 – Rs 98. In optimistic scenario, when rupee stabilises or strengthens, it could be anything in the range of Rs 88 – Rs 90.5.
The factors that can drive baseline scenario are – RBI continues with mild easing to support domestic growth; Foreign portfolio inflows remain weak, especially into debt markets, due to lower Indian yields; Global dollar remains strong, with the US Fed keeping rates high; Oil prices stay moderate, but India’s trade deficit remains elevated; and RBI intervenes only to avoid volatility, not to defend a specific level.
The factors that can drive pessimistic scenario are –Foreign capital outflows accelerate, especially if US/Europe tighten financial conditions further; Oil prices spike above $90–100, worsening India’s import bill; Global risk sentiment weakens (Middle East tensions, China slowdown, global recession fears); Indian growth slows unexpectedly with further rate cuts and then wider rate differential with the U.S.; and RBI uses forex reserves cautiously, allowing INR to find a weaker equilibrium.
The factors that can drive optimistic scenario are – Strong FDI inflows into manufacturing and infrastructure (semiconductors, EVs, renewables);Indian stock market attracts large foreign inflows (EM rebound);US Federal Reserve cuts rates and dollar weakens globally; India’s exports grow faster due to global recovery + weak rupee competitiveness; and India’s services surplus (IT, GCCs, remittances) expands further. (IPA Service)
