Rupee depreciates despite dollar hitting four-year low; here is why

Indian Rupee is on a free fall as it touched the ₹92 mark against the US dollar. The domestic currency has depreciated by almost 3% in 2026 till date and over 6% in one year. This is the second-worst depreciation in one year in the rupee in the past five years. The rupee had slid more than 11% in 2022-23. The current fall in the Rupee comes at a time when the greenback is also on a sliding path, which is unusual as the dollar’s supply helps arrest the fall in the Rupee. However, multiple factors are currently leading to the persistent depreciation of the rupee. Here is why

Tariffs are a new contributing factor

The currency fluctuations are largely subject to the demand and supply factors, which are influenced by multiple reasons. For those reasons, tariffs are a new addition. The US imposed 50% tariffs on India, which is among the highest on the major economies. The tariffs have led to a substantial impact on exports of gems and jewellery, marine products, and auto components, all declining in the range of 5-15%. As export income drops, the trade deficit widens, which consequently leads to more depreciation.

Parabolic rally in Gold & Silver

Gold and Silver prices are witnessing a non-stop and record-breaking trend in global markets. India is a net-importer of gold and silver, which adds burden to its forex kitty. Despite the physical demand and import for gold declining in the past year, the sharp price rise has further contributed to the strong demand of dollar to pay the import bill. As we speak, the gold prices have crossed the $5,540 per ounce mark, rising more than 27% in less than a month. Experts believe the rally will continue as central banks and global institutions increase their demand for physical gold.

Persistent FII selling

The foreign institutional investors who have stayed as net-sellers in the Indian markets have led to a major fall in the rupee, along with other critical factors. Foreign institutional investors have sold more than ₹1.6 lakh crore in 2025 and sold nearly ₹36,000 crore in January 2026.

After hitting a pause in the post-COVID record rally, the FIIs got the opportunity to trim down their exposure in Indian equities. Unaffordable valuations, lack of earnings growth, geopolitical tensions, and tariff impacts were some of the probable reasons for FII selling in 2025.

RBI liquidity management

Apart from the above key reasons, the recent open market operations by RBI between December 2025 and January 2026 were worth ₹2 lakh crore, which also contributed to the rupee’s recent fall against the US dollar. The bond purchase is worth ₹ 2 lakh crore, and large buy/sell swaps, i.e swapping dollar for rupee to fulfil the demand. Lastly, the cut in the interest rates also injects rupee into the system, which further leads to depreciation of the currency.

In summary, the rupee depreciation against the dollar, despite the dollar’s fall, is more of an internal headwind than a global one. Additionally, the fall also helps boost export income and aids high income for the government in the form of treasury income on the US bonds.