How rupee volatility and capital flows are reshaping India's steel market outlook

• Rupee volatility may increase landed input costs
  
  
• Export realisations to get slight support from depreciation
  
  

The Indian rupee has witnessed heightened volatility in recent months, weakening sharply from around INR 87.8 per dollar in late October to nearly INR 91 by mid-December, before stabilising close to the INR 90 level. This recovery was supported by intervention from the Reserve Bank of India (RBI), which sold dollars in the forex market to curb excessive depreciation.

Exchange rate movements are largely driven by foreign currency flows through both the trade account (exports and imports of goods and services) and the capital account, which includes foreign direct investment (FDI), foreign portfolio investment (FPI), external commercial borrowings, and remittances. While India continues to run a sizeable deficit in goods trade, the surplus in services and steady capital inflows have helped maintain overall balance.

FPI outflows add to currency-driven cost pressure

Volatile foreign portfolio investment (FPI) flows have been a key driver of recent rupee movement. Between June and September 2025, FPIs were net sellers of around INR 46,000 crore, contributing to rupee depreciation from about INR 85 per dollar in May to nearly INR 88.8 by end-September.

Renewed investor interest, possibly supported by expectations of a GST cut, led to inflows of around INR 36,000 crore in October, offering temporary relief. However, heavy selling returned in December, when FPIs sold nearly INR 39,000 crore, the second-highest monthly outflow, pushing the rupee to its weakest level near INR 91 per dollar.

Overall in 2025, FPIs recorded net selling across eight months totalling INR 2.06 lakh crore, while purchases amounted to only INR 1.02 lakh crore during four months of net buying. This uneven and volatile pattern has kept persistent pressure on the rupee, intensifying cost challenges for steelmakers reliant on imported raw materials.

Beyond portfolio flows, FDI inflows have remained subdued during the year amid global economic uncertainty. Factors such as major policy changes in the US and delays in India's trade agreement negotiations have contributed to slower corporate investment decisions.

Trade deficit prolongs external pressure

On the trade front, India's deficit has widened in recent months, driven by a sharp rise in gold and silver imports. Although crude oil prices have eased to around $65-70 per barrel, down from an average of about $80 per barrel in FY25, the improvement has not translated into meaningful relief for the trade balance.

One reason has been the reduction in discounted crude imports from Russia, which were often settled through non-dollar arrangements, limiting the currency benefit.

According to RBI data, India's trade deficit widened to around INR 8.1 lakh crore in the December quarter, compared with INR 5.9 lakh crore in the first quarter of FY26. This sustained imbalance has indirectly prolonged rupee weakness, keeping imported steel input costs elevated.

RBI intervention provides stability

On the supportive side, India's strong foreign exchange reserves have helped prevent sharper rupee depreciation. RBI intervention has acted as an anchor during periods of sudden capital outflows.

Forex reserves (excluding gold) declined from $587 billion on 12 September to $552 billion by 2 January, reflecting active efforts to stabilise the currency and contain further spikes in imported cost pressures for the steel sector.

Impact on steelmakers

For Indian steelmakers, rupee volatility translates directly into higher imported raw material costs, particularly coking coal. Supply disruptions in Australia following cyclone-related heavy rainfall in January 2026 have kept coal prices firm, raising procurement costs for domestic mills. Rupee depreciation has further inflated landed costs, as India continues to rely heavily on imported coking coal supplies.

Coking coal imports in CY'25 were assessed at around 62.6 million tonnes (mnt), up by nearly 9.8% y-o-y from 57 mnt in CY'24 (provisional BigMint data), underscoring the sector's sensitivity to global price swings and foreign exchange risks.

At the same time, a weaker rupee may provide some support to exports, as overseas steel sales could yield improved realisations when converted into domestic currency terms.

Outlook

In the near term, the rupee is likely to remain under pressure amid uncertain FPI flows and a persistently high trade deficit. Although RBI intervention should prevent sharp depreciation, imported raw material costs for the steel sector could be impacted. However, a weaker rupee may offer partial support through improved export realisations.