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MUMBAI: The Indian rupee hovered at record low levels against the US dollar on Wednesday, briefly slipping past the 91-per-dollar mark before paring losses after the Reserve Bank of India (RBI) stepped in through buying by state-owned banks, taking it to around 90.5.

After closing at 91.0325 against the US dollar on Tuesday, the Indian unit hit an intraday low of 90.0963 on Wednesday, according to Bloomberg data.

Economists and market participants broadly agree on one point: this is not a current account crisis. India’s external fundamentals remain intact, with the current account deficit hovering around 1-1.3% of GDP—levels that were easily financed in the past.

Pressure on the rupee is instead emanating from the capital account, particularly portfolio outflows, profit repatriation, and a slowdown in net foreign direct investment (FDI).

The rupee has fallen more than 6% this year, making it one of the worst-performing emerging market currencies, as steep US tariffs have weighed on trade and investment flows.

While the currency is expected to remain under pressure until there is progress in US-India trade negotiations, what would it take for the rupee’s depreciation to slow—or even reverse?

Here are five key factors that could change the currency’s trajectory.

Economists believe the single most important stabilizer for the rupee would be stronger and more durable capital inflows.

India used to comfortably fund a 2-2.5% current account deficit when annual FDI inflows were around $130 billion. Over the past two years, however, net FDI has slowed as repatriation and outward investments picked up, even though gross inflows remain healthy, said Gaura Sengupta, chief economist at IDFC FIRST Bank.

FDI is long-term and sticky capital, unlike volatile banking flows or foreign portfolio investment (FPI). To slow the pace of rupee depreciation, India needs a pickup in net FDI, which in turn hinges on higher expected returns on investment, Sengupta said.

Nominal GDP growth acts as a proxy for the returns global investors can earn in India.

After growing at around 12% in FY24, nominal GDP growth slowed to about 10% in FY25 and is now at around 8%, with further easing expected. Slower nominal growth compresses returns, making Indian assets less attractive in dollar terms, especially when the rupee is weakening.

A rebound in nominal GDP, either through faster real growth or higher pricing power for companies, would directly improve India’s investment appeal. A sustained improvement would require reforms or a renewed long-term growth narrative that lifts corporate profitability, Sengupta said.

India remains largely an equity story for foreign investors. Over the past year, global equity markets, from the US to China, Japan, and Korea, have significantly outperformed Indian benchmarks. Indian equities have also been perceived as expensive, reinforcing outflows.

A turnaround in domestic equity markets, driven by companies beating earnings expectations and valuations becoming more reasonable, could help attract portfolio and direct equity flows. That, in turn, would ease pressure on the rupee by improving capital inflows.

Sentiment also plays a role. Markets have increasingly linked the rupee’s weakness to uncertainty around US trade policy and tariffs. While negotiations are under way and officials have indicated that a trade deal with Washington could be reached sooner rather than later, the lack of clarity continues to weigh on flows.

“Talks are on and there is some indication that this may be reached by March 2026. But this will mean that the rupee could continue to be volatile until such time. But then, this is a sentiment-based factor and not an economic one," Bank of Baroda’s economic research team said in a report dated 17 December.

Any concrete progress on a US-India trade agreement would likely lift investor confidence, revive FPI inflows, and reduce speculative pressure on the currency.

On the fundamentals, there is little cause for alarm.

India’s balance of payments remains comfortable. Higher gold prices have added to import costs, but this impact is largely offset by lower oil prices and strong growth in services exports and remittances, which are rising in double digits, Neelkanth Mishra, chief economist at Axis Bank, told reporters on Tuesday.

“To be fair, I think the RBI has done the right job in allowing it (the rupee) to find its own way," Mishra said.

It is wiser for the RBI not to be seen as defending a particular level, as it is better from a longer-term sustainability perspective for importers and exporters to hedge their exposures, he said.

“The reason I think we shouldn't be panicking is that with $675-690 billion (in reserves), you are in a very strong position. See, if the rupee was seen as going out of control, then you would want the RBI to intervene," he said.

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