How Often Does a Falling Rupee Drag the Sensex Down? The Surprising Patterns 12Dec2025
(The views expressed here are for information purposes only and should not be construed as a recommendation or investment advice. While the author is a CFA Charterholder with nearly 25 years of experience in financial markets, this content is intended to share general insights and does not constitute financial guidance. Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)
Graph showing Dollar Rupee Exchange Rate 1973 to 2025 (St Louis Fed)
If you’ve followed financial news for any length of time, you’ve seen this movie before:
“Rupee crashes to a new low!”
“Currency weakness threatens markets!”
Every few now and then, headlines like these flash across screens and social media, instantly sparking anxiety among investors. And it’s understandable — a falling rupee feels like a sign that something big (and bad) is happening.
As someone who has followed the Indian economy and financial markets for over four decades, I’ve lived through some of the most dramatic currency moments in our history. I still remember the shock of the 1991 devaluation, the introduction of Liberalised Exchange Rate Management system (LERMS) soon after, the excitement and uncertainty around the unified (market determined) exchange rate in 1993, the sharp rupee wobble during the Asian Financial Crisis of 1998 and of course, the global tremors of the 2013 taper tantrum.
Each of these moments came with loud headlines, anxious commentary and plenty of predictions about how a falling rupee would drag the stock market into chaos.
To give a better perspective, take a look at the chart above -- a long-term US dollar-Indian rupee exchange rate (USD INR) graph stretching all the way back to 1973. It climbs steadily upward for five decades. At first glance, it looks like one long story of the rupee “falling.”
And yet…
During these same decades, the Sensex has grown since the early 1980s to over 85,000 today.
To put simply, the steady and natural depreciation of the rupee against the dollar has not stopped the Indian stock market for compounding wealth.
When someone says a weak rupee leads to falling markets, it sounds believable. But actually, what does the data say?
The data-driven blog, using episodes of rupee fall in the past 35 years, is an attempt to find out answers. Let's delve deep.
What the above long-term FRED chart shows:
1973 to 1990 Rupee was not market determined (rupee weakned gradually)
1991 to 1998 Sharp rupee devaluation and depreciation after LERMS in 1992 and unified (market determined) exchange rate in 1993
1999 to 2007 Somewhat stable rupee with episodes of rupee appreciation
2008 to 2025 Gradual rupee depreciation, Lehman Bros collapse, Taper Tantrum and COVID-19
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Related articles:
Does a Falling Rupee Hurt Indian Stocks? The Data Say "Not Really" 02Dec2025
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2 Follow-up Article
Last week, I explored this very rupee-fall-leads-to-market-fall anxiety in a blog "Does a Falling Rupee Hurt Indian Stocks?" where I looked at 15 years of calendar-year data to understand whether a falling rupee generally drags Indian stocks down. The results showed no particular pattern in establishing a correlation betwen rupee weakness and Sensex movement.
But that analysis had one limitation: it used calendar-year movements, which often hide the real “shock periods” inside the year.
That’s what led to today’s follow-up. Instead of asking “How did the rupee and Indian stock market move over a whole year?”, this blog asks a sharper, more realistic question:
What actually happens when the rupee starts falling — right from the month the slide begins, until the point it peaks — and the rupee depreciation crosses 8 per cent?
In other words, this time I’m looking at actual episodes of sharp rupee weakness, not arbitrary year-end snapshots. The period may be short (one month), moderate (six months), or nearly a year — the common factor is a meaningful 8%+ rupee decline.
3 Historical Rupee Depreciation Episodes
India experienced 15 major rupee depreciation episodes between 1990 and 2022. These were driven by geopolitical shocks (like the 1990 Gulf War and 1998 Lehman Brothers collapse), domestic policy challenges (1991 crisis, 2011 policy paralysis), global financial tightening (2013 taper tantrum), high current account deficit and COVID-19 pandemic-related pressures.
Depreciation typically ranged from 6 per cent to 20 per cent. The largest drops occurred during the taper tantrum of 2013, the 1991 rupee devaluation, the 2008 global financial crisis (GFC) and the 2011 slowdown. Sensex performance during these periods varied widely: deep crashes in some episodes, strong rallies in others and mild moves in many cases.
Here are the charts >
1) Chart Showing Historical Episodes of Large Rupee Depreciation Versus Dollar - From 1990 To 2000:
2) Chart Showing Historical Episodes of Large Rupee Depreciation Versus Dollar - From 2008 To 2022:
Please click on the charts to view better >
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x Caveats, Shortcomings and Additional Nuances
Even though the episode-based, data-driven approach offers a much sharper picture than simple calendar-year averages, it still comes with some limitations that readers should keep in mind:
a. The Sensex reflects only 30 stocks
While the Sensex often captures the direction of the market, its reaction to currency swings may differ from the broader indices, mid-caps or small-caps. Sectors heavily exposed to imports or exports may react far more strongly than the headline index.
Analysis of sectoral indices is outside the scope of this informal and educative blog. IT Services and pharma usually benefit from INR fall, but import-heavy sectors, like, airlines, oil market companies (OMCs) and electronics firms may react negatively to rupee depreciation.
b. Currency movements reflect many forces, not just domestic factors
A sharp fall in the rupee may be due to global dollar strength, US monetary policy changes, geopolitical risk or weak capital flows — not necessarily India-specific stress. So the “INR fall leads to Indian stocks fall” logic doesn’t always hold.
c. Stocks and the rupee don’t always move at the same time
Currency markets and equity markets have different participants and different drivers. In several episodes, stocks may have fallen before the rupee weakened (anticipating risk), recovered while the rupee was still falling, or moved independently due to domestic policy reforms, earnings cycles or global liquidity. This time mismatch is an unavoidable challenge when defining “episodes.”
d. Results depend on the chosen time window
By design, the analysis identifies sharp falls of 8%+ over one to twelve months. But had we chosen 6 per cent, or 12 per cent, or used 2–18 month windows, the list of episodes — and some of the conclusions — might differ.
e. Sensex returns can look very different depending on the measurement point
Even within the same episode, the Sensex may have dipped sharply mid-way, recovered before the rupee stabilised, or rallied despite currency volatility. Charts often smooth out this noise, so the lived experience may feel more volatile.
f. Correlation does not imply causation
Even if the Sensex falls during an episode of rupee depreciation, that doesn’t prove the rupee fall caused the market decline. Many a time both are responding to the same macro stress — global risk-off, Fed tightening, crude oil price spikes and others.
g. Recovery periods vary widely
Different INR-fall episodes have different recovery durations. A 10-per-cent depreciating spell may reverse in a few weeks in one era, and take a year in another — making comparisons tricky.
h. Regime change in exchange rate system
Another important limitation is that the exchange-rate regime itself has changed over time. Before 1993, the rupee was not market-determined — it moved under administrative controls, dual rates (LERMS) and one-off devaluations, making pre-1993 movements fundamentally different from today’s market-driven currency behaviour.
After the 1993 unified exchange rate, the INR began responding much more to global flows, sentiment and domestic fundamentals, which means older episodes are not strictly comparable with post-1993 data.
Curiously, the International Monetary Fund (IMF) recently dubbed India's exchange rate arrangement as "crawl-like."
i. Regime change in investment flows
Post-2016, the Sensex has become more responsive to domestic institutional investor (DII) flows (buttressed by EPFO Investments) than to foreign portfolio investor (FPI) flows.
This means that even during periods of sharp INR depreciation driven by FPI outflows, strong DII buying has often cushioned the market, weakening the traditional link between rupee weakness and Sensex declines.
j. RBI forex intervention
A further complication is Reserve Bank of India's (RBI) intervention policy: sometimes the central bank intervenes heavily in the forex market and sometimes it allows the rupee to adjust freely, making it difficult to interpret how “natural” or policy-altered each rupee fall truly was.
Since 01Mar1992, Reserve Bank of India, India’s central bank, introduced a dual exchange rate system called Liberalised Exchange Rate Management System (LERMS). It was replaced by a unified exchange rate system on 27Feb1993 to make the exchange rate market-determined.
(the article is not yet completed; please bear with me till I finish it in the next 2 to 3 hours)
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References:
RBI History: Chronology of Events: From 1926 to 2003
RBIcrisis and reforms 1991 to 2000 - chronology of events - Indian rupee devaluation in 1991 / LERMS / unified exchange rate
RBIpress release 27Feb1993 – Unified exchange rate from LERMS
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