The Indian Rupee (INR) has witnessed decline against the U.S. Dollar (USD) in 2025. It recorded a depreciation of 4.3% in the calendar year, making it the worst performing currency in Asia. Analysts warn that without a favourable trade deal with the U.S., the INR may weaken further to 90 against the USD.
Current Exchange Rate Scenario
Recently, the INR hit a record low of 89.66 against the USD, breaching the Reserve Bank of India’s (RBI) defended level of 88.8. Although it recovered slightly to 89.22, the overall trend remains weak. The depreciation is sharper compared to Asian peers like the Chinese Yuan (CNY) and Indonesian Rupiah (IDR), but better than structurally weaker currencies such as the Japanese Yen and Korean Won.
Factors Driving Depreciation
The rupee’s fall is driven mainly by capital outflows rather than current account deficits, which remain relatively benign. Strong US dollar appreciation of 3.6% over two months has intensified pressure on the INR. External shocks such as U.S. tariffs and rising gold prices have worsened the trade deficit, further weakening the currency.
Impact of U.S. Tariffs
The Trump administration’s imposition of a 50% tariff on Indian exports has severely affected trade. This led to a record trade deficit of $41.7 billion in October 2025. The tariff impact has directly contributed to the rupee’s slide by reducing export competitiveness and increasing trade imbalances.
Gold Import Surge and Its Effects
A sharp rise in gold prices in 2025 triggered a surge in gold demand, especially through Gold ETFs. October saw a 200% increase in gold demand, pushing the gold import bill to $14.72 billion. This surge has added pressure on the current account and the INR.
Comparative Currency Performance in Asia
The Chinese Yuan has appreciated due to active intervention by the People’s Bank of China and the State Administration of Foreign Exchange. Other Asian currencies like the Indonesian Rupiah and Philippine Peso have depreciated less than the INR. The rupee’s weakness is thus partly linked to global dollar strength and partly to domestic and external economic factors.
Outlook and Risks
The INR’s future trajectory depends heavily on global dollar trends and the outcome of trade negotiations with the U.S. Without a trade deal, the rupee could depreciate to 90 or beyond. Continued external shocks and capital outflows remain risks for currency stability.
Questions for UPSC:
- Discuss in the light of recent global economic trends how currency depreciation affects a developing country’s trade and investment climate.
- Critically examine the impact of trade tariffs on India’s export sector and overall economic growth with suitable examples.
- Explain the role of central banks in managing currency volatility and maintaining exchange rate stability. How do their interventions influence international trade?
- With suitable examples, discuss the implications of rising gold prices on a country’s current account and foreign exchange reserves.
Answer Hints:
1. Discuss in the light of recent global economic trends how currency depreciation affects a developing country’s trade and investment climate.
- Depreciation makes exports cheaper and more competitive internationally, potentially boosting export volumes.
- Imports become costlier, increasing the import bill and possibly worsening the current account deficit.
- Inflationary pressures arise due to higher costs of imported goods and raw materials.
- Foreign investors may perceive higher risk, leading to capital outflows and reduced foreign direct investment (FDI).
- Currency volatility can deter long-term investments due to uncertainty in returns.
- Global dollar strength intensifies depreciation, affecting developing countries reliant on dollar-denominated debt and trade.
2. Critically examine the impact of trade tariffs on India’s export sector and overall economic growth with suitable examples.
- Trade tariffs increase export costs, reducing competitiveness in global markets (e.g., 50% US tariff on Indian goods).
- Tariffs lead to reduced export volumes, contributing to record trade deficits (e.g., $41.7 billion deficit in Oct 2025).
- Export sector slowdown affects manufacturing and employment, dampening economic growth.
- Tariffs can disrupt supply chains and increase input costs for exporters.
- Retaliatory tariffs or trade tensions may further restrict market access.
- However, tariffs may encourage diversification of export markets and domestic production in the long term.
3. Explain the role of central banks in managing currency volatility and maintaining exchange rate stability. How do their interventions influence international trade?
- Central banks intervene in forex markets by buying/selling currencies to stabilize exchange rates (e.g., RBI defending INR at 88.8 level).
- Monetary policy adjustments (interest rates) influence capital flows and currency demand.
- Intervention builds investor confidence and reduces speculative attacks on the currency.
- Stable exchange rates reduce uncertainty for exporters/importers, facilitating smoother trade transactions.
- Excessive intervention can deplete foreign exchange reserves and distort market signals.
- Examples include China’s PBOC and SAFE actively managing Yuan to support trade competitiveness.
4. With suitable examples, discuss the implications of rising gold prices on a country’s current account and foreign exchange reserves.
- Rising gold prices increase the import bill, worsening the current account deficit (e.g., $14.72 billion gold import bill in Oct 2025).
- Higher demand for gold (e.g., 200% surge in gold ETFs) leads to increased foreign exchange outflows.
- Pressure on foreign exchange reserves as more dollars are spent on gold imports.
- Gold is a non-productive import, not contributing to export earnings or economic growth.
- Increased gold imports can weaken the domestic currency due to higher demand for foreign currency.
- Gold price volatility can add uncertainty to macroeconomic management and trade balances.
