Indian rupee slips to new record low against dollar: Here’s why it could fall further

Vijay Valecha, May 20, Khaleej Times

Vijay Valecha, chief investment officer at Century Financial, said the rupee is also facing pressure from sustained foreign portfolio investment outflows and a strong US dollar.

“This pressure intensified after the Middle Eastern conflict, as India imports about 80–85% of its crude oil, with around half of it transiting via the Strait of Hormuz. In fact, according to the Observer Research Foundation (ORF), for every $10 increase in crude oil prices, India’s current account deficit widens by 40–50 basis points. Hence, to strengthen the rupee, crude oil prices must decline, the US dollar must weaken, and foreign investment inflows must increase,” he said.

Oil prices have been trading above $100 a barrel following the outbreak of the US-Israel-Iran conflict on February 28, pushing fuel prices higher globally and putting pressure on currencies of oil-importing countries.

“As oil prices are expected to remain elevated, dollar strength is likely to continue, and other emerging markets such as South Korea and Taiwan are gaining traction, the rupee is expected to continue depreciating further,” added Vijay Valecha.

Going forward, Valecha said the rupee’s trajectory will largely be dictated by oil prices, US bond yields, foreign capital flows, and intervention by the Reserve Bank of India.

The Indian rupee has been under consistent pressure in 2026, falling by around 7 per cent, mainly due to US President Donald Trump’s tariff threats and the Middle East conflict.

“The Indian rupee now appears slightly undervalued against the dollar when looking at the real effective exchange rate (REER), even though short-term market forces are still weakening it in nominal terms,” he said.

He added that the Reserve Bank of India’s 40-currency REER index, which adjusts for inflation differences, recently dropped below its usual level of 100. In March, the rupee’s 40-currency REER fell to 92.72, the lowest in over ten years.

“This shows the currency is trading well below its fair value in real terms,” he added.

This marks a sharp reversal from late-2024, when the Indian rupee appeared overvalued, with a real effective exchange rate (REER) of roughly 105.41, according to Reserve Bank of India bulletin data.

Even though valuation metrics suggest the rupee is fundamentally undervalued, Vijay Valecha added that the currency may still remain under pressure in the near term due to dollar demand driven by higher oil imports to secure supplies, as well as sizeable equity outflows amid heightened risk aversion and concerns over India’s balance of payments position.

Khaleej Times