Rupee Turns Asia's Weakest Currency in May: Key Reasons Explained

In May 2025, the Indian rupee emerged as the worst-performing currency in Asia, depreciating by 1.27% to settle at ₹85.57 against the US dollar. This drop followed a relatively stronger April when the rupee had touched ₹83.94/$1 levels. However, a mix of domestic and international pressures reversed the trend.

Key Factors Behind the Decline:

1. Tariff Uncertainties: Concerns over new trade tariffs led to unwinding of long rupee positions. Importers, in particular, acted swiftly to hedge risks by locking in forward contracts at more favorable rates due to a fall in one-year forward premiums from 2.34% in April to 1.94%.

2. Geopolitical Tensions: Rising border tensions have created unease among investors, contributing to reduced confidence in the rupee.

3. Monetary Policy Expectations: Speculation that the Reserve Bank of India (RBI) might ease monetary policy further added pressure, signaling a potentially lower interest rate environment that could drive capital outflows.

4. Global Influence: Despite domestic positives like moderating inflation and a stable growth outlook, international variables such as a strengthening US dollar and potential policy shifts by the US Federal Reserve could continue to strain the rupee.

Experts also warn that delays in India-US trade negotiations and unexpected changes in the Fed’s rate stance may further erode investor confidence in the near term.

Here are the advantages and disadvantages of the Indian rupee becoming Asia’s worst-performing currency in May:

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Advantages:

1. Boost to Exports:

   • A weaker rupee makes Indian goods and services cheaper for foreign buyers, which can benefit exporters, especially in sectors like IT, textiles, and pharmaceuticals.

2. More Remittances:

   • NRIs (Non-Resident Indians) may send more money home due to the favorable exchange rate, increasing foreign remittance inflows.

3. Attractive for Foreign Tourists:

   • India becomes a more affordable travel destination, potentially boosting tourism revenue.

4. Encourages Domestic Production:

   • Imported goods become costlier, which may motivate consumers and businesses to prefer locally made products (supporting Make in India initiatives).

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Disadvantages:

1. Rising Import Costs:

   • A weaker rupee increases the cost of essential imports like crude oil, electronics, and machinery, which can widen the trade deficit.

2. Inflationary Pressure:

   • Higher import costs can lead to price hikes across various sectors, affecting the cost of living.

3. Foreign Investment Uncertainty:

   • Currency volatility may make India less attractive for foreign investors, leading to reduced capital inflows.

4. External Debt Becomes Expensive:

   • Repaying loans in foreign currencies becomes more expensive for Indian companies and the government.

5. Negative Market Sentiment:

   • A weak currency can create a perception of economic instability, impacting investor and consumer confidence.