The Indian rupee hit a new lifetime low of 84.7425 against the U.S. dollar on Tuesday, breaching its previous low of 84.7050 touched on Monday. The sell-off in Indian currency was in sync with Asian peers, with the Chinese yuan hitting a one-year low, as markets assessed the impact of newly elected U.S. President Donald Trump’s threats to retaliate with sanctions on BRICS nations attempting de-dollarisation. The sentiment was further dented by India’s disappointing September quarter GDP data coupled with sustained fund outflows by foreign investors amid a growing appetite for the U.S. currency.

The weakness in the Indian rupee is expected to persist in the near term, with the possibility of breaching the 85 per dollar level, says Vishnu Kant Upadhyay, AVP - Research and Advisory at Master Capital Services Ltd.

“The recent record low of the rupee against the U.S. dollar is largely driven by a combination of global and domestic factors. Initially, uncertainties surrounding global events, such as the Trump election, significantly impacted the currency. However, the focus has now shifted to domestic factors, particularly India’s GDP performance, which has become a key driver,” says Kant.

He adds that another significant factor contributing to rupee’s decline is the “gargantuan” selling spree of the foreign institutional investors (FIIs). In the current calendar year, FIIs have withdrawn nearly ₹1 lakh crore from the Indian markets. “This outflow coinciding with the aforementioned factors creates a scenario that particularly does not favour the revival of the INR.”

Kant opined that the Reserve Bank of India (RBI) may intervene in the dollar market to provide the rupee with some temporary strength, although broader economic factors will likely keep the rupee under pressure. “Decisions regarding the cash reserve ratio (CRR) and other measures from the RBI could also play a role in influencing market sentiment and liquidity, but they may not be enough to reverse the rupee's overall weakness,” he adds.

According to industry experts, the weakness in rupee can hurt India’s economic growth as it would raise the cost of imports, resulting in higher inflation rates.

“The recent drop of the Indian rupee vs the U.S. dollar has important ramifications for the Indian economy. Customers may be harmed and their purchasing power diminished. The growing expense of servicing foreign currency debt represents a hardship for companies that have such debt. Indian businesses may find it more costly to obtain money overseas if their currency depreciates since it can undermine investor confidence,” says Pravesh Gour, Senior Technical Analyst at Swastika Investmart Ltd.

On the macro front, the economy is battling with multiple challenges – high base, weak jobs market, and credit tightening by the RBI. However, a silver lining is that the weak economic growth opens the door for an RBI rate cut in its upcoming policy meeting this week. Despite calls for lower interest rates, the recent spike in headline inflation over the threshold level of 6% and the U.S. dollar index strength puts the RBI in a tricky spot for the next 1-2 quarters.

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