The Indian rupee fell by 6 paise to close at 87.12 against the U.S. dollar on March 6, 2025

The Indian rupee fell by 6 paise to close at 87.12 against the U.S. dollar on March 6, 2025. This depreciation was driven by multiple factors, including the Reserve Bank of India's (RBI) recent foreign exchange (FX) swap intervention, global market dynamics, and capital outflows. Below is an in-depth analysis of the reasons behind this movement and the broader implications for India's economy.

1. RBI’s $10 Billion FX Swap and Its ImpactThe most immediate trigger for the rupee’s depreciation was the RBI’s announcement of a $10 billion three-year buy-sell foreign exchange swap. Under this arrangement, the central bank buys dollars from the market while injecting rupees, and later sells those dollars back at a future date. The primary objective behind this move is to boost rupee liquidity in the banking system, especially at a time when liquidity conditions are tightening due to factors such as fiscal year-end demand.

However, such interventions tend to impact forward premiums in the currency market. Following the announcement, forward premiums fell sharply, making it less attractive for exporters to hedge their dollar earnings while prompting importers to purchase more dollars to cover future liabilities. This increased demand for the U.S. dollar put downward pressure on the rupee.

2. Foreign Institutional Investor (FII) OutflowsAnother crucial factor contributing to the rupee’s depreciation is the outflow of foreign institutional investments (FII) from the Indian markets. Recent global uncertainties and concerns over interest rate movements in the U.S. have led to FIIs pulling money out of emerging markets like India. When FIIs withdraw funds, they typically convert rupees into dollars, increasing the demand for the U.S. currency and depreciating the rupee.

Additionally, the U.S. Federal Reserve’s stance on keeping interest rates elevated for a longer period has made U.S. Treasury bonds more attractive compared to emerging market assets. This has led to capital moving away from India towards the U.S., further weighing down on the rupee.

3. Global Market Volatility and Oil PricesThe rupee’s depreciation also reflects ongoing global market volatility, especially in light of fluctuating crude oil prices. India is one of the world’s largest importers of crude oil, and any increase in oil prices typically weakens the rupee, as more dollars are required to pay for imports.

In recent weeks, oil prices have been on an upward trend due to geopolitical tensions in the Middle East and supply cuts by OPEC+. The rise in oil prices has put pressure on India's trade balance and increased demand for dollars from oil-importing companies, contributing to the rupee’s fall.

4. Strength of the U.S. DollarThe overall strength of the U.S. dollar in global markets has also played a role in the rupee’s decline. The U.S. Dollar Index (DXY), which measures the dollar's performance against a basket of major currencies, has been gaining due to strong U.S. economic data and expectations of prolonged higher interest rates.

A stronger dollar generally weakens emerging market currencies like the rupee. Investors tend to prefer the safety of the dollar during times of global uncertainty, which further adds to the depreciation pressure on the rupee.

5. Domestic Economic FactorsWhile external factors played a significant role in the rupee’s movement, domestic economic conditions also contributed to the decline. India’s trade deficit, fiscal deficit concerns, and inflationary pressures have created an environment where the rupee remains under pressure.

Trade Deficit: India’s widening trade deficit has increased demand for foreign currency, as imports exceed exports.

Inflation Concerns: If inflation rises, it may prompt the RBI to maintain a tighter monetary policy stance, which can affect foreign investment flows.

Corporate Dollar Demand: Indian companies with foreign liabilities tend to hedge against currency fluctuations, leading to periodic increases in dollar demand.

Broader Implications and OutlookThe depreciation of the rupee has both positive and negative implications. On the positive side, a weaker rupee makes Indian exports more competitive in global markets, potentially boosting sectors like IT services, textiles, and pharmaceuticals. However, the downside includes higher import costs, especially for essential commodities like oil and electronics, which can contribute to inflation.

Looking ahead, the rupee’s trajectory will depend on multiple factors, including global economic trends, RBI interventions, and policy decisions by major central banks. If the RBI continues to intervene in the forex market to manage volatility, it may provide some short-term relief. However, sustained pressure from external factors such as U.S. monetary policy and crude oil prices will likely keep the rupee under pressure in the near term.

In conclusion, while the rupee’s depreciation to 87.12 against the U.S. dollar was influenced by RBI’s FX swap, FII outflows, global economic conditions, and domestic factors, its future movement will depend on how these variables evolve in the coming months.