Rupee (INR) depreciation against the dollar (USD) has gathered pace, with the domestic currency plunging to a record low of 96.96 in Wednesday's trade, reflecting macroeconomic vulnerability. Just over five months ago, the local currency hit the 90-per-dollar mark for the first time in December 2025, after breaching the 85-per-dollar level for the first time in December 2024. 

Elevated crude oil prices, strong dollar demand and cautious foreign institutional investor flows have accelerated the INR's slide past key psychological levels. The prevailing trends have raised concerns over imported inflation and rising input costs for corporates, said Ponmudi R, CEO of Enrich Money.

To be sure, the rupee first breached the 80-per-dollar level in July 2022 and the 75-per-dollar mark in March 2020. The move from 85 to the current record low took just 17 months.

Systematix in a note said dwindling external capital flows and widening trade deficit raise the spectre of a third successive year of balance of payments deficit. "The confluence of stagflationary pressure and a BoP deficit makes the RBI’s task of preventing the rupee from breaching the psychologically critical 100-to-the-dollar mark a genuinely daunting one," it said.

Abhishek Bisen, Head of Fixed Income, Kotak Mahindra AMC said the rupee has weakened 5 per cent since the onset of the Iran war and 11 per cent over the past year. He said the widening current account deficit — expected to exceed 2 per cent of GDP in FY2027, underscores growing external vulnerabilities. 

Elevated crude oil prices, currently around $110, along with persistent geopolitical tensions in West Asia, have significantly increased dollar demand and dampened risk sentiment, making the rupee one of the weaker-performing currencies in Asia, Bisen said.

The falling rupee triggered moves by the government, which increased customs duty on gold and silver and hiked auto fuel prices twice. Foreign brokerage Citi has reportedly said that the government authorities may now consider steps to encourage foreign inflows, and could look at tightening rules on outward investment by businesses.

"While the INR appears relatively undervalued on a REER basis, suggesting some valuation support, near-term currency dynamics are likely to remain driven by oil price movements given India’s high import dependence. In this backdrop, despite intermittent policy interventions to smooth volatility, continued external pressures and capital market sensitivities are expected to keep the rupee largely range-bound or moving sideways in the near term," he said. 

Jateen Trivedi, VP Research Analyst - Commodity and Currency, LKP Securities noted that sustained higher crude prices are increasing concerns over India’s import bill and widening trade deficit, which is keeping sentiment weak for the rupee.

While the RBI may initially look through the near-term surge in inflation, its persistence, compounded by a weakening currency, could eventually force a reversal of policy rates, Systematix said. 

"That would mark a painful unwinding of the aggressively accommodative stance adopted last year, one delivered through a profusion of liquidity measures, steep rate cuts, and a significant easing of regulatory guardrails for lenders," the brokerage said.