Rupee Depreciation and FPI Outflows

Rupee Depreciation and FPI Outflows

  • Context:   

  • The Indian Rupee (INR) has breached the 90-mark against the US Dollar for the first time, ending at an all-time low of 90.19 

  • This decline is largely driven by persistent equity selling by Foreign Portfolio Investors (FPIs) and uncertainty surrounding the India-US trade deal 

  • Reasons for the Fall: 

  • Despite low inflation, High GDP Growth (8.2%) and soft crude oil prices, the rupee is weakening sharply due to external and financial-sector pressures, not domestic macro instability. 

  • Foreign investors have been persistently selling Indian stocks, moving capital to US, European, and Japanese markets.  

  • In the current calendar year (2025), FPIs have sold Rs 1.52 lakh crore of shares. 

  • The lack of clarity and delay regarding the India-US trade deal has created caution in emerging market currencies 

  • Another main reason for rupee depreciation is due to widening of trade deficit. 

  • Exports to the US fell sharply due to higher US tariffs (50%) 

  • There is steady demand for dollars from sectors like oil, metals, and electronics 

  • About Foreign Portfolio Investment (FPI) 

  • FPI involves an investor purchasing foreign financial assets that are passively held 

  • These short-term investments typically include equities, bonds, derivatives, mutual funds, and guaranteed investment certificates 

  • Common FPI investors include individuals, companies, and foreign governments seeking portfolio diversification. 

  • FPIs are primarily governed by SEBI and RBI. SEBI's FPI Regulations, 2019 lay down detailed rules for registration, permissible investments, and compliance. 

  • Permitted instruments for Foreign Portfolio Investment in India 

  • Listed shares on the stock exchange 

  • Mutual funds 

  • Government securities 

  • REITs, InvITs, and Category III Alternative Investment Funds 

  • Exchange traded derivative 

  • Non-convertible debentures (NCDs)  

  • Impact and RBI's Role 

  • The slide has increased hedging costs, with forward premiums jumping as corporates rush to secure protection 

  • While depreciation makes Indian goods cheaper for foreigners (aiding exports), it increases the cost of imports, potentially impacting inflation 

  • RBI showing soft approach mainly to conserve resources. This is mainly to avoid “disorderly volatility” rather than target a specific rate.