Not just US dollar, Indian rupee has tanked up to 25% across 9 major currencies in 1 year

For years, conversations around the Indian rupee have revolved almost entirely around one currency — the US dollar. Every fresh record low against the greenback in the last couple of months sparked debate over oil prices, inflation, and foreign outflows. But over the past year, a far bigger and more striking trend has quietly unfolded beneath the surface: the rupee has weakened against every major global currency and its steepest fall hasn’t even been against the dollar.

Data shows that the Indian rupee has fallen the most against the Australian dollar, sliding more than 25% since May last year. The Chinese yuan and the Euro follow close behind. On the other hand, the rupee has shown relative resilience against the Japanese yen.

What’s causing the freefall?

The broad-based weakness comes at a time when India’s macroeconomic pressures have intensified sharply.

The Middle East conflict, hanging by a fragile ceasefire thread after more than two months of fighting, has pushed crude oil prices above $125 a barrel at one stage, reigniting fears over India’s inflation-growth balance because of its heavy dependence on energy imports. The spike in oil prices has simultaneously strained India’s external account and weighed heavily on capital flows.

The rupee’s recent slide to a record low of Rs 95.33 against the US dollar was driven by what market participants describe as a textbook reflexive trade. Rising oil prices are triggering foreign institutional investor (FII) outflows, which are in turn amplifying dollar demand from oil importers, overwhelming the Reserve Bank of India’s efforts to stabilize the currency.

April alone saw FII outflows of $7.5 billion, taking year-to-date outflows beyond $20 billion. At the same time, Brent crude has surged from around $72 a barrel in February to nearly $110 now. The result is a double squeeze on the rupee: both the trade deficit and the capital account are exerting pressure in the same direction, leaving the currency without a natural buffer.

The most immediate impact has been on India’s oil import bill. According to Anindya Banerjee, Head Of Commodity and Currency Research, Kotak Securities, the monthly oil import burden has jumped by roughly $7–8 billion from a baseline of $10–11 billion. That additional dollar demand, sustained month after month, is significant in the context of India’s forex market and feeds directly into spot USD/INR demand.

Elevated crude prices effectively act as an inflationary tax on the economy. They raise logistics and operating costs across sectors, widen the fiscal deficit through subsidy and excise pressures, and eventually feed into headline inflation with a lag. Each of these factors weakens growth expectations and weighs on capital inflows.

Weakness before Iran war

To understand why currencies such as the Australian dollar and Chinese yuan have seen far sharper gains against the rupee, it is important to recognise that the Indian rupee had already been underperforming even before the latest oil shock intensified pressures.

Before crude became the dominant market narrative, the RBI was effectively allowing a weaker rupee as part of a broader policy response to a deteriorating global trade environment, Banerjee added. With trade tensions and tariff conflicts involving the United States continuing to cloud the global outlook, a softer currency offered support to Indian exporters at a time when domestic inflation remained relatively contained.

With inflation pressures muted earlier, the cost of permitting rupee weakness was limited, while the export competitiveness benefit remained meaningful. In effect, the rupee had already been drifting lower before the West Asia conflict layered an oil shock on top of it.

Chinese yuan, Australian dollar Vs Rupee

The Chinese yuan actually appreciated against the US dollar during the same period. That meant the currency gained against the rupee almost mechanically: while the rupee weakened against the dollar, the yuan strengthened against it, causing the INR/CNY cross to widen sharply in China’s favour.

The Australian dollar followed a similar path. The AUD did not weaken meaningfully against the US dollar over the past year; instead, it remained firm and even gained ground at various points. As a result, AUD/INR reflected a combination of rupee weakness and Australian dollar strength versus the dollar — naturally leading to a much steeper move, experts added.

Japanese yen presents exact opposite case

The relatively muted 3.54% move in JPY/INR does not reflect rupee strength or any outperformance against a traditional safe-haven currency. Instead, it reflects the fact that the yen itself has been consistently weakening against the US dollar over the past year, weighed down by macroeconomic weakness in Japan.

Rising oil prices have hurt Japan as well. As one of the world’s largest energy importers, Japan has faced many of the same imported inflation pressures that India has grappled with. The yen therefore weakened alongside the rupee, causing the JPY/INR cross to remain comparatively stable as the two depreciating currencies effectively offset each other.

“The muted JPY/INR move should not be read as the rupee holding firm against an Asian safe haven. It is two weak currencies cancelling each other out at the cross, nothing more,” Banerjee said.

What’s next for Rupee?

What happens next for the rupee will depend largely on four variables: crude oil prices, geopolitical developments, RBI intervention and foreign capital flows.

After the recent fall toward Rs 95.33 against the dollar, the rupee is likely to remain highly volatile and heavily news-driven in the near term, according to Ponmudi R, CEO of Enrich Money.

“If oil prices cool and global risk sentiment improves, the rupee could stabilize in the 93–94 range. However, if geopolitical tensions escalate further or crude spikes sharply again, the possibility of testing the 96–97 zone cannot be ruled out,” he said.

At this stage, the rupee is not facing a structural crisis. But it is clearly under intense cyclical pressure from external macroeconomic forces. And the bigger takeaway from the past year may not simply be that the rupee weakened against the dollar — but that it weakened against almost the entire world.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)