The rupee slipping below ₹90 to a dollar has triggered sharp political debate, especially with Parliament in session. Yet, beyond rhetoric, the episode raises deeper economic questions: what is driving the depreciation, how unusual is it in global terms, who gains or loses from it, and whether policymakers should be worried. A closer look suggests that while the fall reflects pressure points, it is not necessarily a sign of economic distress.
What is driving the rupee’s slide?
At its core, the rupee’s movement reflects the balance of demand and supply for dollars. Several factors are working simultaneously. India’s trade deficit has widened, with imports growing faster than exports, increasing dollar demand. This has fed into a higher current account deficit, adding pressure on the currency.
Another important factor is foreign portfolio investment (FPI) outflows. Global investors have been pulling money out of Indian markets, not because of a sudden loss of faith in India’s economy, but due to relatively high valuations and better short-term returns available elsewhere. These outflows directly raise demand for dollars.
Overlaying these fundamentals is uncertainty on the trade front, particularly around expectations of a tariff agreement between India and the United States. Delays and ambiguity have hurt sentiment, reinforcing currency pressures. While the Reserve Bank of India (RBI) has intervened to smooth volatility, its actions have been measured, indicating that the depreciation so far is within what the central bank considers manageable.
Is the rupee falling more than other currencies?
In the short term, the rupee has indeed appeared among the weaker-performing currencies, especially over the last few months. However, this picture changes when viewed over a longer horizon. Over the past two years, most emerging market currencies have depreciated more sharply against the dollar than the rupee, with only a few exceptions.
It is also important to recall that the rupee remained largely stable for nearly a year before the recent slide. Seen in this context, the current depreciation partly represents an adjustment rather than a collapse.
Does a weaker rupee reflect economic weakness?
A falling currency is often interpreted as a sign of economic trouble, but that link does not hold strongly in this case. India’s real economy continues to show resilience. GDP growth has remained robust, inflation is relatively benign, fiscal consolidation is on track, and public capital expenditure continues.
India’s external buffers also remain comfortable. Foreign exchange reserves cover close to a year of imports, giving policymakers room to manage external shocks. There has been no major structural deterioration in economic fundamentals; the rupee’s weakness is better understood as driven by transient factors and sentiment rather than systemic fragility.
Who benefits and who loses from a weaker rupee?
Theoretically, a depreciating currency improves export competitiveness. Indian exporters, especially in services such as IT, stand to gain from better rupee realisations, which can support profitability and potentially domestic consumption through higher incomes.
At the same time, imports become more expensive. For an import-dependent economy, this raises costs for firms reliant on foreign inputs and can marginally add to inflation. However, estimates suggest that even a sustained 5% depreciation may raise inflation by only about 0.3–0.4 percentage points—manageable in an environment where inflation is relatively low.
The net impact, therefore, is uneven. Exporters and service firms may benefit, while importers face higher costs. The overall economy experiences a mixed outcome rather than a clear gain or loss.
Should policymakers be worried?
Currency depreciation often triggers alarm, especially when it breaches psychological thresholds like ₹90 per dollar. The real concern is not the level per se, but excessive volatility. Sharp and unpredictable swings complicate planning for exporters and importers and can create self-fulfilling expectations of further decline.
The RBI’s approach of intervening only to curb excess volatility, rather than defend a specific rate, reflects this understanding. So far, there is little evidence that the rupee’s fall will derail growth, spike inflation, or destabilise public finances in a significant way.
What lies ahead for the rupee?
Much will depend on global financial conditions, the direction of capital flows, and clarity on trade-related uncertainties. If portfolio flows stabilise and export growth improves, pressure on the rupee could ease. Conversely, prolonged global risk aversion or further trade disruptions may keep it under strain.
For now, the rupee’s depreciation appears more a story of sentiment and adjustment than of crisis.
What to note for Prelims?
- Determinants of exchange rates: trade deficit, capital flows, RBI intervention.
- Difference between current account deficit and trade deficit.
- RBI’s role in managing volatility, not targeting a fixed exchange rate.
What to note for Mains?
- Critically examine whether currency depreciation reflects economic weakness.
- Analyse sector-wise impacts of a weaker rupee on exports, imports, inflation, and fiscal balance.
- Discuss the trade-offs involved in RBI’s exchange rate management strategy.
