The Indian rupee faces potential further weakness, with projections suggesting it could slide to 92.5-93 per dollar if current market pressures persist, according to Dhiraj Nim, Economist and FX Strategist at ANZ Research. The currency has already reached fresh record lows, moving into what Nim describes as "uncharted territory" at a pace that has surprised many market observers.

Key Drivers Behind Rupee Weakness

Nim identifies two primary forces contributing to the rupee's decline. The first involves continued outflows from Indian markets, driven by visible stress from the ongoing earnings season and broader global risk concerns. However, he emphasizes that the more significant and persistent pressure comes from real money flows, particularly corporate hedging demand.

"I believe this weakness had been growing for quite some time, and it's not all of a sudden," Nim stated, suggesting a structural bias for further rupee weakening rather than temporary market volatility.

RBI's Measured Response Strategy

The Reserve Bank of India appears to be adopting a more tolerant approach toward the rupee's decline compared to previous interventions. Nim notes that since the pressure originates from fundamental flows rather than speculative activity, the central bank is less likely to intervene aggressively as it has in the past. This measured response provides the RBI with greater flexibility to address domestic liquidity concerns, which have become increasingly important according to ANZ's analysis.

Conditions for Rupee Stabilization

For the rupee to find stability and reverse its weakening trend, Nim outlines several critical requirements:

• Meaningful pickup in nominal gross domestic product growth
• Reduction in earnings-related market stress
• Improvement in current account deficit metrics
• Enhanced foreign direct investment inflows

Domestic Factors Driving Bond Yield Increases

Indian bond yields have experienced upward pressure, which Nim attributes primarily to domestic rather than global factors. The weak rupee has discouraged foreign bond inflows, while fiscal stress at both central and state government levels has added to yield pressures. Additionally, expectations of an inflation rebound contribute to the rising yield environment.

Nim contrasts this domestic-driven scenario with the spike in Japanese Government Bond yields, which he links to Japan's fiscal plans and broader global risk aversion. "I would believe that at least Indian yields currently are driven more by domestic factors," he emphasized.

The rupee's trajectory toward the 92.5-93 per dollar range represents a significant shift in India's currency landscape, with implications extending beyond immediate market movements to broader economic fundamentals and policy considerations.

The Indian rupee has weakened to a record low of ₹91.45 against the US dollar, reflecting multiple pressures on the currency from both domestic and international factors. This depreciation means Indians now require more rupees to purchase one dollar, indicating a significant shift in the currency exchange dynamics.

Foreign Investment Outflows Drive Currency Pressure

Foreign institutional investors (FIIs) selling Indian equities has emerged as a primary factor behind the rupee's decline. When these investors exit Indian markets, they convert their rupee holdings back to dollars for repatriation, creating additional demand for the US currency. This increased dollar demand directly contributes to the rupee's depreciation as the supply-demand balance shifts unfavorably.

Rising US Bond Yields Attract Global Capital

High US government bond yields represent another significant pressure point for the rupee. As yields on US bonds increase, global investors are redirecting their funds toward these safer, higher-yielding assets. This capital flow toward the United States strengthens the dollar while simultaneously weakening emerging market currencies like the rupee.

Global Uncertainties Create Risk-off Environment

Global developments including renewed trade frictions and geopolitical uncertainties have contributed to a broader risk-off sentiment among investors. During such periods, market participants typically move away from riskier emerging market assets and seek refuge in safer currencies like the US dollar. This flight to safety occurs regardless of India's underlying economic fundamentals, demonstrating how global sentiment can override domestic factors.

Trade Agreement Uncertainty Weighs on Sentiment

Uncertainty surrounding US-India trade agreements has added another layer of pressure on the rupee. When trade negotiations face delays or lack clear updates, investors become concerned about future business prospects, including potential impacts on exports, imports, and overall economic growth. This uncertainty translates into reduced market confidence and more cautious behavior from foreign investors.

Pre-budget Market Caution

The rupee's weakness also reflects typical pre-Union Budget market behavior, where investors adopt a wait-and-see approach. Until the government announces key policy decisions regarding taxes, spending plans, subsidies, and industry support measures, market participants remain reluctant to make significant investment commitments. This cautious sentiment creates additional pressure on the foreign exchange market and contributes to rupee volatility.