The Indian Rupee in Free Fall: Understanding the 2025 Crash and Its Wider Implications

By the final weeks of 2025, the Indian rupee crossed a significant threshold that few economists thought possible just a year earlier: ₹90 to one US dollar. For the first time in its history, the currency experienced its worst annual performance among major global currencies, falling more than 5 percent against the dollar in a single year. Markets now openly discuss the possibility of the rupee reaching ₹100 within the next twelve to eighteen months. This is no longer a slow, managed decline; many analysts call this movement a free fall for the rupee.

What Does “Crashing” Actually Mean in Currency Terms?  

In everyday language, “crashing” suggests a sudden, dramatic collapse—like a car crash or a computer program freezing. In foreign-exchange markets, however, a “crashing rupee” or “rupee crash” simply means a rapid and largely uninterrupted decline over a short period. Unlike an equity-market crash, which can happen in minutes, currency crashes usually unfold over weeks or months, but the speed and impact still feel shocking to citizens and policymakers alike.

The 2025 episode is notable because the decline has been both steep and widespread. The rupee has weakened not only against a rising US dollar but also against the euro, pound sterling, Japanese yen, and even many emerging-market currencies. In technical terms, India’s currency became Asia’s worst-performing major unit and one of the weakest worldwide in 2025.

Why Is the Indian Rupee Crashing Against the Dollar in 2025?

Several powerful forces have combined to push the rupee lower:

1. Resurgent US Dollar Strength
   After Donald Trump’s re-election and the announcement of reciprocal tariffs and “America First” trade policies, global capital returned to US assets. Higher expected US interest rates and a risk-off environment strengthened the dollar index (DXY) by more than 7 percent in the second half of 2025.

2. Persistent Current-Account Pressure
   India’s merchandise trade deficit grew significantly due to high commodity prices, especially for energy and edible oils. Festive-season gold imports went over US$17 billion in October and November alone. A larger import bill directly raises the demand for dollars.

3. Foreign Portfolio Outflows
   Foreign institutional investors withdrew about US$17 to 20 billion from Indian equities and debt in 2025. This was the largest annual exit since the COVID-19 panic in 2020.

4. Domestic Industrial Slowdown
   The Index of Industrial Production (IIP) growth fell to only 0.4 percent in October 2025. This indicates that manufacturing, the sector most likely to generate export revenue, is struggling. Slow export growth eliminates a key source of dollar inflows.

5. Uncertainty over US–India Trade Relations
   The possibility of 10 to 60 percent tariffs on Indian exports, including textiles, pharmaceuticals, and IT services, has made investors anxious and postponed long-term investments.

Together, these factors have overwhelmed the Reserve Bank of India’s (RBI) efforts to stabilise the currency. Despite selling an estimated US$30 to 35 billion from its forex reserves in 2024 to 2025, the central bank has only managed to slow the decline, not reverse it.

Has the Rupee Really Been in “Free Fall”?

Strictly speaking, the RBI has continued to intervene, and the market remains orderly. However, from a psychological and economic perspective, the phrase “rupee in free fall” makes sense: the currency has lost over 35 percent of its value against the dollar since early 2014 (from approximately ₹60 to more than ₹90), and the pace has picked up significantly in 2025.

The Three Common Narratives—and Why They Are Only Partly True

When any currency weakens significantly, three usual explanations come up from official and media sources. In 2025 in India, these have been mentioned often:

1. “It’s good for exports.”
   Theory: A cheaper rupee makes Indian goods and services more competitive abroad.  
   Reality: While this is accurate in textbooks, India's export basket relies heavily on imports, including electronics, pharmaceuticals, engineering goods, and textiles. Rising import costs for raw materials and components often erase any competitive advantage. In October 2025, merchandise exports dropped by 12 percent compared to the previous year. Additionally, India's share of global merchandise exports stays below 2 percent, despite the rupee depreciating for over a decade.

2. “The rupee isn’t weak; the dollar is too strong.”
   This was the official line offered by the Finance Ministry for much of 2025.  
   Reality: Although the dollar has strengthened, the rupee has lagged behind nearly every major and emerging-market currency. By December 2025, it was Asia’s worst performer and ranked among the bottom five globally. It is no longer valid to blame only the dollar.

3. “A managed gradual depreciation is normal.”
   Historical average: 3–4 per cent per annum.  
   2025 reality: More than 5 percent in a single year, with fluctuations during the year much greater than usual. The scale has gone beyond “managed”.

The Direct Impact on Households and Businesses

The consequences of a crashing rupee are immediate and broad:

• Higher import costs: India imports roughly US$650 to 700 billion worth of goods every year. This includes crude oil, coal, edible oils, electronics, gold, and pharmaceutical APIs. A 5 percent drop in the currency adds about ₹3 to 3.5 lakh crore to the country’s import bill. 
• Fuel and transport inflation: Petrol and diesel prices will rise, even with some relief from excise-duty cuts. This will increase transportation and food costs.
• Overseas education and travel: Studying in the US, UK, Canada, or Australia now costs 15 to 25 percent more in rupee terms than it did two years ago. An annual fee of ₹25 lakh has jumped to ₹30 to 32 lakh almost overnight.
• Electronics and consumer durables: Mobile phones, laptops, and home appliances that depend on imported parts have experienced price hikes or delayed discounts.
• Corporate margins: Companies with unhedged dollar debt or significant import needs, such as airlines, refineries, and fertiliser units, are facing balance-sheet challenges.

The GDP Growth Conundrum

India reported 8.2 percent real GDP growth for the July to September 2025 quarter, leading to celebrations. However, several independent economists have expressed concerns:

• Extremely low inflation, at 0.25 percent retail CPI in October, artificially inflates real GDP figures. This is because real GDP equals nominal GDP minus inflation. When inflation is nearly zero, real growth appears higher than the actual economic momentum. 
• Growth is heavily tilted towards capital-intensive sectors such as banking, IT services, and refineries, while labour-intensive sectors like agriculture, textiles, and construction are lagging. Rural wage growth is weak, and agricultural growth remains around 3.5 percent, even with a good monsoon

A steady rise in inflation, which seems likely as imported price pressures from the rupee take effect, will automatically reduce reported real GDP growth in the upcoming quarters, even if nominal activity stays decent.

What Can Policymakers Do?

The RBI faces a tough situation. Defending the rupee uses up reserves. Letting it depreciate further raises inflation. Cutting interest rates to encourage growth might lead to bigger capital outflows. Most analysts think the central bank will keep up a "managed float with a focus on stability" while hoping for:

• An early US-India mini trade deal that clears up tariff uncertainty.
• An increase in foreign direct investment (FDI), which has remained surprisingly strong compared to portfolio flows.
• Quicker export diversification into services and high-value manufacturing.

Looking Ahead: ₹100 on the Horizon?

Currency forecasts are known to be challenging, but high US interest rates, possible US tariffs, and India’s dependence on imported energy and goods make further decline likely. Many global banks now expect a base range of ₹94 to ₹96 by March 2026 and ₹98 to ₹102 by the end of the next fiscal year.

The sharp drop of the Indian rupee in late 2025 is more than just a number. It reveals deeper issues: ongoing trade imbalances, slowing manufacturing, heavy dependence on imported energy, and sensitivity to global market sentiment. A weaker currency can theoretically benefit exporters, but India’s economic structure limits these advantages and increases the costs for everyday people.

It is crucial to understand why the Indian rupee is falling and why it continues to decline despite repeated assurances from officials. This understanding is important for anyone trying to grasp India’s growth story as it moves into its next phase. The journey from ₹90 to potentially ₹100 will test the currency's strength and the credibility of the wider economic story that has defined the past decade.