On May 7, 2025, the Indian rupee opened 19 paise lower at 84.62 per US dollar, a notable slide from its previous close of 84.43. This depreciation, though modest in absolute terms, reflects a confluence of geopolitical tensions and economic headwinds that have unsettled markets.
What could be the reason for the currency fall? The primary trigger appears to be the heightened India-Pakistan tensions following Operation Sindoor, India’s retaliatory airstrikes on terrorist sites in Pakistan and PoK after the April 22 Pahalgam attack. Pakistan’s airspace closure and suspension of flights at Indian airports like Srinagar and Jammu have disrupted trade and logistics, fostering a risk-off sentiment.
Historical parallels, such as the 2019 Balakot airstrikes, saw the rupee weaken by 1.5% temporarily due to similar geopolitical uncertainty. Investors, wary of escalation, are shifting to safe-haven assets like the US dollar, exerting downward pressure on the rupee.
Global economic factors are also at play. The US dollar index, though down 0.19% to 98.08, remains relatively strong, buoyed by US President Donald Trump’s tariff policies and a robust US economy.
This strength, seen earlier in 2025 when the rupee hit a low of 87.95 on February 10, continues to challenge emerging market currencies. Additionally, Brent crude prices, up 0.54% to $72.55 per barrel, are stoking fears of a higher import bill for India, a net oil importer. Rising oil prices, as observed during the 2019 India-Pakistan tensions, often inflate India’s trade deficit, weakening the rupee.
Domestic market dynamics further exacerbate the situation.
Foreign institutional investors (FIIs), spooked by geopolitical risks, are pulling back, with outflows reported in India-focused ETFs like EPI. The BSE Sensex and Nifty, which fell after the Operation Sindoor news, reflect this caution. Moreover, the Reserve Bank of India (RBI) has been less aggressive in intervening, possibly to preserve forex reserves, which stood at $700 billion recently but face pressure from dollar demand.
However, despite these challenges, India’s economic fundamentals—6.5–7% GDP growth, robust GST collections, and the impending India-UK FTA—offer resilience. The rupee’s slide may be short-lived if tensions de-escalate.