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The exchange rate between the U.S. Dollar (USD) and the Indian Rupee (INR) has experienced notable fluctuations over the past few months, influenced by a combination of domestic economic factors, geopolitical events, and global financial trends. This report provides an analysis of the USD/INR exchange rate movements from January to April 2025, examining the key drivers behind these changes and offering insights into potential future trends.

Exchange Rate Trends: January to April 2025

January 2025: The USD/INR exchange rate began the year at approximately 85.56 on January 1, 2025. Throughout the month, the rupee exhibited a weakening trend, reaching a high of 86.70 by January 31. The average exchange rate for January was around 86.28.

February 2025: The rupee continued its depreciation in February, with the exchange rate peaking at 87.79 on February 7. The average rate for the month stood at 87.04.

March 2025: March saw some volatility, with the rupee strengthening slightly mid-month but ultimately closing weaker. The exchange rate reached a high of 87.47 on March 1 and a low of 85.44 on March 31, averaging 86.55 for the month.

April 2025: In April, the rupee faced increased volatility due to escalating geopolitical tensions. On April 29, the rupee hit a year-to-date high of 84.95 before dropping to a low of 85.39, ending the day at 85.26.

Factors Influencing the USD/INR Exchange Rate

Several factors have contributed to the fluctuations in the USD/INR exchange rate during this period:

1. Geopolitical Tensions:

In late April 2025, a deadly militant attack on tourists in Kashmir heightened tensions between India and Pakistan. This incident led to increased market volatility, with the rupee's one-month implied volatility reaching 5.5%, the highest since March 2023. Investors reacted to unverified reports of military operations and the closure of over half of Kashmir's tourist destinations, leading to a depreciation of the rupee.

2. U.S. Economic Policies and Federal Reserve Actions:

The Federal Reserve's indication of fewer rate cuts in 2025 strengthened the U.S. dollar, exerting downward pressure on the rupee. The Fed's updated forecast suggested two rate cuts in 2025 instead of the previously expected four, signaling a cautious approach due to persistent inflation. This development, along with upcoming policy changes by President-elect Donald Trump, posed risks for the rupee.

3. Foreign Portfolio Flows:

Persistent portfolio outflows have also weighed on the rupee. Overseas investors have net pulled out over $16 billion from local stocks in 2025. This exodus of foreign capital has been a significant factor in the rupee's depreciation.

4. Domestic Economic Indicators:

India's economic growth has shown signs of slowing, with concerns about inflation and fiscal deficits. The Reserve Bank of India's (RBI) monetary policy decisions, including potential interest rate cuts, have been influenced by these domestic economic conditions. The weakening rupee has also cast doubt on anticipated interest rate cuts by the RBI, as further depreciation could exacerbate inflationary pressures.

Future Outlook

Analysts anticipate that the rupee may continue to face downward pressure in the coming months. A Reuters poll of 36 foreign exchange analysts indicated that the rupee is expected to drop to 87.18 per dollar in three months, 87.50 in six months, and 87.80 by March 2026. Factors contributing to this outlook include slowing economic growth, limited further weakening of the dollar, and expectations for a short easing cycle by the RBI.

Additionally, the potential for reciprocal tariffs on India by the U.S. could negatively impact India's exports and economic growth, further weakening the rupee. The Reserve Bank of India's interventions in the foreign exchange market and monetary policy decisions will play a crucial role in managing the rupee's trajectory.

Conclusion

The USD/INR exchange rate has been influenced by a complex interplay of geopolitical events, U.S. economic policies, foreign portfolio flows, and domestic economic indicators. While the rupee has faced depreciation pressures in recent months, its future trajectory will depend on the resolution of geopolitical tensions, the Federal Reserve's monetary policy decisions, and India's domestic economic performance. Market participants should closely monitor these factors to make informed decisions regarding the USD/INR exchange rate.