Likely to see calibrated Rupee weakness in real terms if no respite on trade front

While the Rupee has weakened 2.9% against the Dollar YTD in 2025, the depreciation against other major currencies has been far more pronounced. The Rupee has fallen 16% against the Euro, 11% against the Pound, and 6% against the Chinese Yuan — significant moves by any measure. On a trade-weighted basis, Rupee overvaluation against a basket of currencies has corrected by nearly 8%.

Historically, periods of Rupee weakness have coincided with sharp spikes in volatility. The spot-vol correlation in USDINR has typically been positive, meaning that as the spot moves higher, volatility rises. This is natural since most participants are short USDINR for carry.

What is unusual this time is that despite the Rupee hitting an all-time low, volatility has remained muted. Three-month at-the-money vols have barely held above 5% and have now eased to 3.5%. Similarly, three-month 25 Delta risk reversals — which reflect the difference between implied volatility of calls and puts — usually spike during bouts of Rupee depreciation.

Calls, which serve as insurance against further Rupee weakness, generally become expensive relative to puts. Yet, these too are exceptionally low, hovering near zero.

This suggests there is no panic in the market. Participants appear to view the Rupee’s move as controlled, possibly even intentional. Instead of weakening sharply against the Dollar and other currencies, the Rupee has largely been prevented from strengthening amid broad-based Dollar weakness.

Supporting this perception are benign macro fundamentals. With Brent crude below USD 70 per barrel, India’s Current Account Deficit (CAD) remains contained. RBI’s FX reserves, buoyed in part by valuation effects, are back above USD 700 billion. Together, stable CAD and a healthy reserve cushion provide comfort.There is also a sense that keeping the Rupee relatively weak complements monetary easing and liquidity infusion to support growth. Going forward, the pace of depreciation is likely to slow. However, if tariff pressures persist, engineering gradual Rupee weakness may be used as a policy lever to bridge the competitiveness gap with peers.Any such move, however, is expected to be controlled, calibrated, and non-disruptive — more of a staircase-like adjustment than a one-way slide.

(The author, Abhishek Goenka is Founder and CEO IFA Global)

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