Synopsis: Despite the Reserve Bank of India (RBI) injecting over Rs 2.9 lakh crore into the banking system since January 2025, the Indian rupee has emerged as one of Asia’s worst-performing currencies.
Massive liquidity support, dollar sales, and record forex reserves have not stopped the slide. The reason lies deeper in India’s structural trade deficit, heavy oil imports, foreign investor outflows, and a resurgent US dollar. Despite the Reserve Bank of India’s efforts to inject over Rs 2.9 Lakh Crore ($35 billion) into the financial system since January 2025, the Indian rupee has become one of the worst-performing currencies in Asia’s history.
Picture the Indian economy as a large ship facing fierce ocean storms. The RBI, the captain, is throwing everything overboard to keep it steady by buying bonds, conducting dollar swaps, and running repo operations. Yet, the rupee continues to sink, down over 4.3% against the US dollar in 2025 alone. It’s a story of good intentions clashing with tough realities like endless oil imports, fleeing foreign investors, and a very strong dollar.
History
Let’s go back to early 2025. India was enjoying strong growth numbers. But soon, cracks began to show. The rupee, once stable around 83 to the dollar, started to slide.
By November, it fell to 91, marking a significant drop, the steepest among Asian currencies, including the Thai baht and Chinese yuan. Traders labelled it Asia’s weakest currency, even worse than during the 2022 Ukraine oil shock when crude hit $100 a barrel. Fast forward to February 2026, and the situation remains painful. Families feel the pinch at petrol stations; importers are scrambling for dollars. However, the RBI did not remain inactive.
Since January 2025, the RBI has pumped massive liquidity into banks to calm them down and reduce wild swings. In December 2025, the RBI announced a huge package of Rs 2.9 lakh crore, Rs 2 lakh crore through bond purchases, and $10 billion (Rs 90,000 crore) in dollar-rupee swaps.
On the foreign exchange front, the RBI sold dollars aggressively. Net sales amounted to $31.98 billion from January to October 2025, with gross sales hitting $208 billion, offset by purchases. By November, it reached $43.2 billion, plus spot interventions of about $26 billion from September to November. Reserves also rose to a record high, reaching $709.41 billion by January 2026, indicating the RBI’s strong financial position.
So why is the rupee depreciating?
The answer lies in India’s persistent trade deficit. India relies heavily on oil, 90% is imported, as well as electronics and machinery. In the second quarter of FY26 (ending September 2025), the current account deficit narrowed to 1.3% ($12.3 billion).
This constant demand for dollars keeps the pressure on the rupee. Every tanker from Saudi Arabia or shipment of chips from Taiwan requires greenbacks, which continuously drives the rupee down. The RBI can sell dollars to mitigate spikes, but offsetting the underlying demand is difficult, similar to trying to mop the floor during a flood.
Global factors made this situation worse. The US dollar surged back in late 2025, despite earlier declines. The DXY index, which tracks dollar strength, rose sharply due to shifts in policy and safe-haven flows.
Higher US interest rates attracted capital back to the US, impacting emerging markets significantly. India felt the effects as foreign investors pulled out. Foreign institutional investors withdrew Rs 1.98 lakh crore ($24 billion) from equities in 2025 alone, with over Rs 27,000 crore in outflows in September. Cumulatively over 21 months, the total sales added up to Rs 3.19 lakh crore.
The Indian rupee is one of the worst performers in the Asian region in 2025, falling by nearly 5 percent. While the Indonesian rupiah has weakened by 3.98 percent, the Philippine peso by 1.44 percent, the South Korean won by 0.63 percent, etc.
When foreign investors sell stocks or bonds, dollars leave India, flooding the forex markets and further weakening the rupee. Increased risk aversion from global events intensified this situation, including US tariff discussions and fears of a Chinese slowdown.
Consider Rajesh, an importer of electronics in Mumbai. In January 2025, he locked in dollars at Rs 84. By December, it reached Rs 91, causing his costs to rise by 8% and squeezing his margins. He doesn’t blame the RBI but wonders why its interventions don’t have lasting effects.
The RBI aims to control volatility, not to keep the rupee consistently strong. Ex-Governor Shaktikanta Das explained that these interventions are meant to smooth out “disorderly” movements, not to fight market trends indefinitely. Draining reserves constantly risks future problems. Currently, reserves can cover imports for 11 months, but ongoing dollar sales would erode that buffer.
When we compare to peers, the Thai baht benefited from a surge in tourism dollars, while the yuan stabilised through controls. The rupee, however, remains vulnerable. If oil prices hit and stay at around $80-90 per barrel in the future, the import bill grows substantially, and this also weighs down the demand for the dollar, which in turn hurts the Indian rupee.
The RBI’s strategies are effective. Repo rate cuts eased borrowing, while Variable Rate Reverse Repo (VRR) auctions reduced excess liquidity earlier and now reversed to inject more. Swaps are a clever tool: the RBI sells dollars on the spot market and buys them back forward, injecting rupees immediately without permanent loss. The $10 billion swap in December flooded the market with 90,000 crore right away. Yet, underlying fundamentals still apply pressure. A strong dollar means even a neutral policy weakens the rupee.
The real effects are significant. Inflation rises due to import costs; exporters benefit from cheaper goods abroad. However, households pay more for items like gold and iPhones.
What can we learn?
The RBI has bought time; however, fixing the trade deficit requires hedging against oil prices, boosting exports, and scaling up initiatives like “Make in India.” Geopolitical issues, such as US-China trade relations and tensions in the Middle East, loom over this situation.
In this challenging narrative, the RBI’s billions of dollar support has held the line, but the forces of trade deficits and capital outflows have proven stronger. The rupee’s troubles are not a failure but a reminder that central banks guide, while markets navigate. As 2026 unfolds, keep an eye on oil prices, foreign investor trends, and Federal Reserve actions. Hope remains if the dollar weakens and inflows return. For now, India’s currency story illustrates resilience in the face of challenges.
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