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The exchange rate between the Indian Rupee (INR) and the U.S. Dollar (USD) has experienced notable fluctuations over the past few months, influenced by a combination of domestic economic policies, global trade dynamics, and market sentiments. This report provides an analysis of the recent trends, underlying factors, and future outlook for the INR/USD exchange rate.

Recent Trends in INR/USD Exchange Rate

As of June 3, 2025, the INR/USD exchange rate stands at approximately 85.35, indicating a slight appreciation of the rupee compared to its position earlier in the year. In May 2025, the rupee declined by about 1%, reversing gains from the previous two months and underperforming relative to other Asian currencies. (reuters.com) This decline was influenced by geopolitical tensions, corporate dollar demand, and interventions by the Reserve Bank of India (RBI).

Factors Influencing the Exchange Rate

Several key factors have contributed to the recent movements in the INR/USD exchange rate:

1. U.S. Trade Policies and Tariffs: The U.S. administration's stance on tariffs has introduced volatility in currency markets. In late May 2025, a U.S. federal court blocked most of President Donald Trump's "reciprocal tariffs," leading to a strengthening of the dollar and a corresponding dip in the rupee. (reuters.com) However, subsequent legal developments and policy uncertainties have continued to impact market sentiments.

2. Reserve Bank of India's Interventions: The RBI has actively managed the rupee's value through interventions in the foreign exchange market. By absorbing dollar inflows and supporting the rupee during periods of market stress, the RBI aims to maintain currency stability. Analysts anticipate that the RBI's focus on rebuilding foreign exchange reserves, which stood at $685.7 billion as of May 16, 2025, could lead to continued underperformance of the rupee. (reuters.com)

3. Foreign Capital Flows: The rupee's performance is also influenced by foreign investment trends. After significant outflows in the first quarter of 2025, foreign investors have injected $2.5 billion into Indian equities in the second quarter, reversing some earlier withdrawals. This renewed interest is partly due to India's stable domestic fundamentals and the RBI's pro-growth policies, including recent rate cuts. (reuters.com)

4. Global Economic Indicators: Disappointing U.S. labor and consumption data have contributed to a weaker dollar, providing some support to the rupee. Additionally, developments in U.S. trade policy, particularly the potential for a trade agreement between India and the U.S., could influence the exchange rate dynamics. (reuters.com)

Future Outlook

The future trajectory of the INR/USD exchange rate will depend on several interrelated factors:

• Trade Negotiations: Ongoing discussions between India and the U.S. regarding trade agreements and tariffs will play a crucial role. A favorable trade deal could bolster the rupee, while continued uncertainties may exert downward pressure.

• Monetary Policies: The RBI's monetary policy decisions, including potential interest rate cuts, will impact capital flows and investor confidence. A pro-growth stance may attract foreign investments, supporting the rupee.

• Global Economic Conditions: The performance of the U.S. economy, particularly labor market data and consumption trends, will influence the dollar's strength. Weakness in the dollar could provide room for the rupee to appreciate.

• Market Sentiments: Investor perceptions of geopolitical stability, economic reforms, and corporate earnings in India will affect demand for the rupee.

Analysts have varied projections for the rupee's performance. BofA Global Research expects the rupee to strengthen to 84 per U.S. dollar by December 2025, citing factors such as broad U.S. dollar weakness, India's stable domestic fundamentals, and the RBI's pro-growth policies. (reuters.com) Conversely, a Reuters poll suggests that the rupee may lose most of its recent gains and fall back to historic lows within the next 12 months, attributing this to slowing economic growth and limited further weakening of the dollar. (reuters.com)

Conclusion

The INR/USD exchange rate has been subject to significant fluctuations influenced by domestic policies, global trade dynamics, and market sentiments. While recent trends show a slight appreciation of the rupee, the future outlook remains uncertain, contingent upon trade negotiations, monetary policies, global economic conditions, and investor sentiments. Stakeholders should closely monitor these factors to make informed decisions in the evolving currency landscape.