Foreign portfolio investors (FPIs) have emerged as the main driver of daily fluctuations in the Indian rupee, which has weakened below the 91 per dollar mark amid persistent outflows and trade uncertainties, according to a Bank of Baroda report released on December 17, 2025.
The analysis, based on monthly data, identifies FPI flows, RBI spot interventions and changes in the forward market as the main factors influencing short-term currency movements, although interventions often weaken the statistical correlation. In the first 11 trading days of December, FPIs were net sellers nine times, putting pressure on the rupee.
The bank expects volatility to persist until an India-US trade deal is struck, which could probably be by March 2026 – this is a sentiment-based factor, not an economic one. India’s external account remains stable, with the current account deficit under control, but capital flows – dominated by FPIs – could prove decisive. The trade deficit appears to have limited impact on short-term rupee dynamics.
Everyday current-account developments (e.g., IT receipts, remittances) and other capital inflows (FDI, ECBs) influence markets, but are not tracked daily, reducing direct links.
Separately, another Bank of Baroda report estimated Q3 FY26 headline CPI inflation at 0.4%, lower than RBI’s estimate of 0.6%, on the back of stable core inflation despite softening of food prices and rise in seasonal vegetable prices.
Continued FPI selloff – over $18 billion in equities by 2025 – reflects global rebalancing, high valuations and stalled trade talks, highlighting rupee weakness against shifting sentiments.
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