The rupee has tumbled to fresh lifetime lows this week, falling past 91 against the dollar. The big question now is how low could the currency could go.

The rupee is trading at half its value from just over a decade ago and has been the worst-performing currency in Asia this year. That's despite India’s economy growing faster than any other major country and the dollar’s overall strength declining.

The rupee has fallen 6.2 per cent against the dollar so far this year. It ranks behind only the Turkish lira and Argentina’s peso among 31 major currencies in terms of losses.

Analysts are increasingly questioning whether the rupee has settled into a “new, weaker normal”, as a result of global politics, trade tensions and foreign investor actions.

The rupee’s record low against the US dollar has been “primarily driven by external factors, not domestic economic weakness,” says Deepak Agrawal, chief investment officer at Kotak Mutual Fund.

On paper, the rupee should be a resounding success story. Economic growth is said to be jogging along at over 8 per cent, inflation is at record lows and foreign exchange reserves, at nearly $700 billion, are among the largest stockpiles in the world.

Instead, other forces are driving the currency lower. The most important is trade. India imports far more goods than it exports, particularly energy, electronics and machinery. In normal circumstances, strong exports or foreign investment would help offset this imbalance. But India's performance is weak on both scores.

That pressure has intensified since Washington slapped punishing tariffs of 50 per cent on most Indian goods entering the US, India’s most important export market. The tariffs make Indian products more expensive and less competitive, cutting export earnings and reducing dollar inflows. The rupee has taken the brunt of the hit.

“The 50 per cent tariff imposed on India is one of the major factors behind the current phase of rupee depreciation,” the State Bank of India says in a report.

At the same time, foreign investors have been yanking money out of Indian markets. This year, they have sold more than $18 billion worth of Indian shares with India’s stock market underperforming global peers, particularly China.

For foreign investors, a falling rupee is a powerful discouragement. Even when Indian shares rise, those gains can be wiped out when converted back into dollars. As investors sell Indian assets, they buy dollars, boosting demand for the US currency and pushing the rupee down further. It can become a vicious cycle.

Another factor weighing on the rupee is a shift in the Reserve Bank of India's (RBI) stance toward a weakening currency. The central bank is intervening to smooth sharp or what analysts call "disorderly moves" -- by selling dollars and buying rupees. But it's been clear it will not protect the currency at any particular level.

The bank has cut interest rates to prioritise economic growth and signalled borrowing costs will remain low. While this supports domestic demand, it also makes the rupee less attractive to foreign investors seeking higher returns.

“The RBI has clearly let the market determine the price and has been intervening only to control any excessive volatility,” says Anil Bhansali, treasury head at Finrex Treasury Advisors.

On Tuesday, the central bank did intervene strongly when the rupee crashed below the 91-per-dollar mark for the first time, touching a record low of 91.075 before ending at 90.93. On Wednesday, the rupee firmed to 90.38, helped by a softer dollar amid expectations of more US rate cuts.

A weaker rupee does have advantages as it makes Indian exports cheaper and boosts exporters’ rupee earnings. The risk, though, is that prolonged weakness becomes self-reinforcing and discourages foreign investment.

Without a breakthrough in US-India trade talks that would improve export competitiveness, markets believe the rupee is likely to weaken further. Strategists increasingly expect it to drift into the 90–95 range in 2026, with the central bank intervening only to slow the pace of decline rather than reverse it.

“The RBI remains focused on curbing volatility rather than defending a specific level,” says Kotak’s Agrawal, adding that the rupee could strengthen in 2026 if a trade deal is finalised and investment flows improve.

For ordinary Indians, the effects of the weaker rupee are tangible in their everyday lives. Imported fuel and electronics become more expensive, squeezing household budgets. Overseas education and foreign travel cost more in rupees. Businesses that rely heavily on imported inputs face rising costs, which can feed into higher inflation at home.

The one development that could materially change the outlook is a trade deal between India and the United States. However, comments from the government's chief economic adviser that a pact is unlikely before March have hurt sentiment. “The US-India trade deal still seems distant,” says Anil Bhansali, treasury head at Finrex Treasury Advisors.

A US-India agreement could revive exports and restore investor confidence. Analysts estimate it could strengthen the rupee by three to six per cent over time, potentially returning it to the high 80s against the dollar. Crucially, it might also put a floor under the currency, making Indian assets less risky for foreign investors.

Without a deal, the outlook is far less promising. High tariffs will continue to weigh on exports, foreign investors will remain wary and demand for dollars will stay strong. In that scenario, the rupee could keep sliding through 2026.

Normally, currency weakness helps exporters regain competitiveness. But with US tariffs of 50 per cent, exchange rate depreciation alone cannot solve the problem. Economists say the rupee would need to fall much further to fully offset the tariffs, a step the central bank is unlikely to permit given the knock-on domestic inflationary effects.

This leaves the rupee in an unenviable middle ground. It's too weak to attract global investors, yet not weak enough to minimise trade barriers.

As the new year approaches, markets are increasingly seeing a weaker rupee as the base case scenario. A trade deal with Washington could halt the currency’s fall and trigger a modest recovery. Without one, this week’s record low may not be the bottom, but another stage in a longer slide.