The IMF’s reclassification of India’s exchange-rate regime in 2025 marks a turning point for the rupee. This blog breaks down this ‘crawl-like arrangement’ tag, the reasons behind the rupee’s decline, and its impact on equity markets, bond yields, and household finances.
In November 2025, the IMF changed the way it categorizes India’s currency regime. The rupee was moved out from the ‘stabilized’ bucket and placed into what it calls a “crawl-like arrangement”. IMF’s reassessment comes at a sensitive moment, one in which the rupee has underperformed most major Asian currencies, even as headline growth numbers remain strong.
This contrast invites a deeper question: why would the IMF reassess the rupee’s exchange-rate stance at a time when India stands out as one of the world’s fastest-growing large economies?
Source – Reuters
While the Reserve Bank of India (RBI) maintains that interventions are only to curb “excessive volatility”, the IMF noted in its 2025 Article IV Consultation that the rupee has followed a remarkably narrow, predictable downward trend, fitting the technical definition of a “crawl”.
The phrase “crawl-like” sits at the end of a longer chain of currency developments. To see how the IMF arrived at this classification, you must first understand the broader exchange-rate categories it uses.
IMF’s Broad classification categories
Generally, the IMF classifies the exchange rate arrangements of nations in three categories.
- Fixed exchange-rate regime
A fixed exchange-rate regime anchors the currency to another currency or a basket, prioritizing stability over monetary autonomy.
- Free-floating rate regime
A free-floating regime allows the currency to be fully determined by market forces, with minimal central-bank intervention.
- Managed-float rate regime
A managed float, where India has historically sat, occupies the middle ground. It allows the currency to be market-driven but is frequently managed by the central bank to prevent disorderly moves.
The crawl-like arrangement is a sub-categorization within the managed-float rate regime. In this arrangement, a currency is no longer tightly stabilized around a narrow band. Instead, it is allowed to adjust gradually along a discernible trend, absorbing external pressures through the foreign-exchange market rather than persistent reserve deployment.
In the Indian context, the IMF reclassification underpins cumulative reasons for the rupee fall, such as:
- The trade negotiation long haul
- Gradual selling from FPIs and low inflow of foreign funds
- A trade deficit that continues to widen despite strong GDP growth
So, how are the above factors contributing to the rupee’s decisive weakening? Let’s take a look.
A Trade Impasse That Quietly Weakened Dollar Inflows
After multiple rounds of negotiations, India is about to enter 2026 without a meaningful trade resolution with the United States. Following the August 1, 2025, imposition of a 25% “reciprocal” tariff, the U.S. further escalated duties to 50% on August 27 as a penalty for India’s continued purchase of Russian crude oil. The cost of that stalemate is visible in the ongoing weakness in the rupee.
However, not all sectors carried the weight of these tariffs equally. While sectors such as pharmaceuticals, critical drug inputs, energy products, minerals, and advanced electronics were shielded through exemptions, a broad base of India’s traditional export industries, like textiles, leather, chemicals, footwear, gems, and jewelry, found themselves exposed. For these exporters, demand did not disappear, but profitability likely came under strain.
Let’s take an example of an Indian garment exporter. When cumulative U.S. tariffs climb to 50%, passing the entire cost to the buyer isn’t really an option; the exporters risk losing the order altogether. So, they do what many are forced to do: trim prices or swallow part of the tariff hit to keep the relationship intact. The clothes still land on U.S. shelves at acceptable prices, but the exporter brings back fewer dollars per shipment.
While export volumes appear stable, each transaction contributes to less foreign currency. Over time, such discounted realizations across exporters quietly thin dollar inflows, weakening the natural support for the rupee even without a visible collapse in trade activity.
Changing Patterns in Foreign Portfolios and Direct Investments
Alongside trade dynamics, the rupee’s trajectory in 2025 has also been shaped by shifts in foreign capital and global events; most visibly through sustained portfolio selling, a more measured pace of foreign direct investments and overall global liquidity tightening. Let’s take a look at each factor individually.
- Constant selling pressure from FPIs
Source – NSDL
Since the start of the year, FPIs have slowly limited their exposure to the Indian markets. This has resulted in net outflows of ₹1.57 lakh crore. While these exits are often discussed in the context of equity market sentiment, their impact on the rupee operates through a far more mechanical channel.
FPIs enter Indian markets using foreign currency, predominantly U.S. dollars. When they unwind positions, the process reverses. Indian assets like equities and bonds are sold, and the proceeds are converted from rupees back into dollars. These dollars are repatriated overseas. This way, each step adds incremental demand for foreign currency within the domestic forex market.
B. Sustained Weakness in FDI Flows
Source – The Hindu
(Note – The above chart shows the monthly FDI volume in $ million)
Foreign direct investment flows weakened steadily through mid-2025, with net FDI turning negative for the third straight month in October. As fresh inflows slowed and outflows picked up, long-term foreign capital began exiting India faster than it entered. This shift matters because FDI is typically the most stable source of external funding. When these investments move out, dollars leave the system directly. With fewer long-term dollars coming in and more being repatriated, the rupee loses an important layer of support; adding to the pressure already building from trade imbalances and portfolio outflows.
C. The Carry Trade Reversal amidst Global Liquidity Tightening
Beyond domestic factors, part of the sustained portfolio outflows in 2025 also resulted from a broader shift in global liquidity conditions. Up till recently, global investors financed positions in higher-yielding markets like India by borrowing in low-cost currencies, especially the Japanese yen, and investing that money where returns were higher; a strategy known as the carry trade. As interest rates in the U.S. and Japan rose in 2025, that equation began to shift. Higher funding costs made these trades less attractive, leading investors to scale back risk exposure and pull capital back. From a global perspective, this retreat doesn’t necessary reflect a loss of faith in India’s growth story, but a broader unwinding driven by tighter global financial conditions.
The Persistent Imbalance in India’s Trade Account
Source – ceicdata.com
(The above chart shows India’s trade deficit on a monthly basis in USD dollar terms in 2025)
India continues to buy far more from the world than it sells and that imbalance shows up most clearly in the currency. In 2024, the trade deficit was $263.31 billion. In 2025, the pressure remained intense, highlighted by a record monthly deficit of $41.6 billion in October; though there was a surprising rebound in November 2025, where the deficit narrowed to $24.5 billion due to a surge in engineering and electronics exports.
From a currency perspective, every import requires dollars, while exports bring them in. When imports consistently outpace exports, demand for dollars naturally exceeds supply, and the rupee adjusts.
Furthermore, India’s energy dependence makes this pressure harder to escape. As of late 2025, India’s reliance on imported crude oil has climbed to nearly 96-97% as domestic production lags. These purchases are essential and dollar-denominated, leaving little room to cut back.
As long as imports grow faster than exports and energy dependence stays high, the rupee carries a built-in downward bias.
That said, a weaker rupee can also be a rare positive for India’s trade deficit. A gradually weaker currency improves India’s price competitiveness in global markets, particularly against manufacturing-heavy peers such as China and Vietnam. For overseas buyers, a softer rupee reduces the effective cost of sourcing from India, helping support export volumes in price-sensitive segments. While this does not reverse the trade deficit, especially given India’s heavy energy imports; it can slow the pace at which the imbalance widens, acting as a modest counterweight rather than a cure.
The Aftermath of a Falling Rupee: Markets Feel It First; Households Next
A falling rupee sets off a chain of adjustments; first visible in equity and bond markets, and later in the day-to-day finances of households.
Equity Markets Adjust to a Weaker Rupee
For equity markets, a falling rupee is a double-edged sword. While the U.S. tariffs exempted sectors like pharma, critical drugs, energy products, etc., these sectors are more likely to see immediate translation benefit as dollar revenues convert into higher rupee earnings.
But the broader signal is less comforting. Factors like pricing pressure and softer global demand have limited margin expansion for many exporters.
However, amidst the increasing outflow of foreign funds, India’s capital markets have seen a structural shift, keeping it intact throughout the year. 2025 marked a shift when Domestic Institutional Investors (DIIs) leapfrogged Foreign Institutional Investors (FIIs).
DIIs now own 17.62% of market capitalization against FIIs’ 17.22% as of March 2025. This trend is projected to provide stability and inject liquidity into the Indian capital markets going forward as projections suggest that by 2030, DIIs could command 25% of market capitalization.
Bond Yields Stay Elevated as the Rupee Weakens
Currency weakness shows up more directly in fixed income. A softer rupee increases imported inflation risks, particularly through energy and commodity channels. In these situations, bond investors respond by demanding higher compensation for inflation and currency uncertainty.
In 2025, the 10-year G-sec yield remained elevated, reflecting persistent macro uncertainty and reduced room for aggressive rate cuts.
With uncertainty rising in the Indian markets, bonds are looking lucrative for the year ahead. If you are an investor who wants higher risk-adjusted returns, you can lock-in stable yields up to 8% to 15% with meaningful growth with Jiraaf.
How A Weaker Rupee Filters into Everyday Costs
For households, A weaker rupee raises the cost of fuel, electronics, medicines, travel, and overseas education. As inflation doesn’t rise suddenly, it sneaks through imported energy products, eroding your purchasing power in small and steady increments.
Navigating the Rupee’s Path in The Foreseeable Future
The rupee’s gradual decline does not, by itself, point to a weakening in the Indian economy. Instead, it reflects a currency that is increasingly responding to macroeconomic signals, during a time when the Reserve Bank of India has chosen restraint over constant intervention. In that sense, the rupee’s trajectory signals an adjustment process, not a loss of stability.
For the INR to find a more stable footing, external confidence needs to be rehabilitated. And the most efficient way to do this would be working out a trade deal with the United States as soon as possible. Additionally, a shift in stance from passive to active interference by the RBI could also help in managing the dollar’s growing demand and smoothing supply through its reserves, to restrict any further fall in the Rupee. All things considered, there is a possibility of one or many outcomes of this developmentto happen, shaped by how the discussed dynamics evolve in the future.
