Rupee Value – Why is it under pressure, despite the dollar deluge?

During the previous week, the USDINR, hovered between ₹95/$ and ₹96/$. While the RBI has been defending the rupee at around 96, the bigger question is why the deluge of dollar deposits is not hardening the rupee?

Rupee weak, despite the dollar deluge

RBI had reported $56 billion of inflows through the special window, including $52 billion of FCNR(B) deposits, till 13-Aug. As of 20-Aug, informal estimates peg the total inflows at closer to $75 billion. With one more week to go for the FCNR(B) special window, the estimates are that the collections could be closer to $90 billion. That would be nearly 13% of the current dollar reserves, but the impact on the rupee has been limited. One argument is that, had it not been for the FCNR(B) flows, the rupee could have been worse off. There are 3 key factors that are keeping the rupee under pressure.

Hardening global yields is a major issue

If you look at the yields on the US treasuries, it has been at multi-decadal highs. The 10-year US treasuries are trading at 4.736%, the highest level since 2007. The 30-year US treasuries are trading at 5.276%, the highest level since 2001. This hawkishness has been driven by fears of rising inflation and the expectation that the Fed will have to raise the rates, sooner rather than later. But the bigger reason for the spike in yields is the US debt finally crossing the $40 trillion mark. Fiscal pressures will keep yields at elevated levels. What this means is that the US dollar index remains closer to the 100 mark. A strong dollar, combined with a hardening yen, are pressuring the Indian rupee.

Structure of the trade deficit is another factor

For India, it is not just the trade deficit, but the structure of the trade deficit that matters. In Apr-Jul 2026, Indian exported petroleum products of $21.15 billion and imports were $64.81 billion. Electronics Exports were $16.16 billion and imports $36.59 billion. Drugs and chemicals exports were $19.46 billion and imports were $28.55 billion. In short, India’s biggest merchandise exports have huge import content, actually contributing to the trade deficit. That is structurally keeping the rupee weak, and the Middle East crisis is worsening this gap. Above all, the services surplus has saturated as IT exports are feeling the pressure of AI impact. The trade account is a key factor in rupee weakness.

It boils down to how RBI managed the currency

Markets have not been too happy with the way the currency crisis was handled by the RBI. The RBI first decided to intervene by selling dollars. When that was depleting forex reserves rapidly, RBI shifted to building short positions on the dollar. At one point, dollar shorts had touched $106 billion, which is now down to below $90 billion. It still means; bulk of the FCNR(B) flows will go towards neutralizing the dollar shorts. Also, the FCNR(B) flows are likely to create an outstanding liability of over $100 billion after 5 years, and that overhang will keep the rupee under pressure. With FPI flows still elusive, it looks like the FCNR(B) may, at best, be a crisis management strategy.