Rupee Depreciation and India’s Economic Challenges 2025

The Indian rupee has depreciated around 7% since late November 2024. It moved from about ₹83.4 to ₹89.2 against the US dollar. This decline echoes the 2018 slide when the rupee fell 11%-12%. Both periods faced global dollar strength, rising US interest rates, and trade tensions affecting emerging markets. The Reserve Bank of India (RBI) has actively intervened to manage the volatility but cannot fix the exchange rate under the current regime.

Rupee Depreciation Context

The rupee’s fall is driven by external pressures. A widening current-account deficit is a key factor. Higher imports of bullion have increased as investors seek safe assets amid uncertainty. Exporters face challenges due to high US trade tariffs. These factors combined create a hostile global macroeconomic environment. The RBI’s role is to smoothen volatility, not to peg the currency.

RBI’s Interventions and Currency Swaps

The RBI has used currency swaps to provide liquidity and support the rupee. In 2019, it completed a $5 billion three-year dollar/rupee swap. Recently, a $10 billion buy-sell swap auction was conducted to inject long-term liquidity. Since November 2024, the RBI sold about $50 billion in forex reserves to stabilise the rupee. These measures are standard tools to manage capital flow reversals and prevent disorderly depreciation.

Foreign Exchange Reserves and Inflation Trends

India’s foreign exchange reserves remain robust at nearly $693 billion. This cushion helps absorb shocks and maintain market confidence. Domestic inflation has eased , with headline Consumer Price Index (CPI) inflation at 0.25% in October 2025. This is well below the RBI’s target band of 2%-6%. Low inflation gives the RBI flexibility to tolerate modest rupee depreciation without aggressive interest rate hikes.

Challenges of Oil Dependency and Trade Policy

India’s heavy reliance on oil imports remains a critical vulnerability. Crude oil accounts for over 20% of total imports in FY25. The shift from cheaper Russian crude to costlier US oil imports adds inflationary pressure. Monetary policy alone cannot address this structural issue. The government must prioritise faster transport electrification as a strategic imperative. Additionally, current trade agreements with Japan, UAE, and ASEAN have worsened the trade balance. A more coherent and strategic trade policy is needed to diversify trade routes and reduce external vulnerabilities.

Managed Float Exchange Rate Regime

India follows a managed float system for the rupee. The RBI intervenes to reduce volatility but does not fix the exchange rate. This allows market forces to determine currency value while avoiding sharp fluctuations. The approach balances external shocks with domestic economic stability.

Implications for Exporters and Importers

A weaker rupee can improve export competitiveness but raises import costs. Exporters face challenges from US tariffs and global uncertainty. Importers, especially of crude oil and bullion, face higher costs. The combined effect influences inflation, trade deficit, and growth prospects.

Future Outlook and Policy Imperatives

Sustained rupee stability requires coordinated monetary, fiscal, and structural reforms. Reducing oil dependency and revising trade policy are urgent. Enhancing domestic manufacturing and export diversification can mitigate external shocks. The RBI’s role remains crucial in managing liquidity and market confidence.

Questions for UPSC:

1. Critically analyse the impact of exchange rate volatility on emerging market economies with reference to India’s rupee depreciation.
2. Explain the role of the Reserve Bank of India in managing currency fluctuations. How effective are currency swaps as a tool for stabilising the rupee?
3. What are the economic implications of India’s dependence on crude oil imports? Discuss the strategic measures to reduce this vulnerability with suitable examples.
4. Comment on India’s current trade policy approach. How do bilateral trade agreements affect the trade balance and economic resilience?

Answer Hints:

1. Critically analyse the impact of exchange rate volatility on emerging market economies with reference to India’s rupee depreciation.

1. Exchange rate volatility leads to uncertainty in trade and investment decisions, affecting growth in emerging markets like India.
2. Depreciation increases import costs, especially of essential commodities like crude oil, fueling inflationary pressures.
3. Volatility can cause capital outflows, putting pressure on foreign exchange reserves and financial markets.
4. Export competitiveness may improve with a weaker currency but is often offset by global trade tensions and tariffs.
5. India’s rupee depreciation reflects external factors – global dollar strength, rising US interest rates, and trade tensions.
6. Managed float regime allows RBI to smooth volatility but cannot fully prevent depreciation under external shocks.

2. Explain the role of the Reserve Bank of India in managing currency fluctuations. How effective are currency swaps as a tool for stabilising the rupee?

1. RBI follows a managed float, intervening to smooth excessive volatility without fixing the exchange rate.
2. It uses forex reserves to sell dollars and buy rupees, stabilising the currency during sharp falls.
3. Currency swaps inject liquidity and shore up forex reserves, helping prevent disorderly depreciation.
4. Examples – $5 billion 3-year swap in 2019 and $10 billion buy-sell swap in 2025 to infuse long-term rupee liquidity.
5. Since Nov 2024, RBI sold around $50 billion forex to stabilize the rupee, showing active intervention.
6. Swaps are effective as temporary buffers but cannot fully counter persistent external pressures driving depreciation.

3. What are the economic implications of India’s dependence on crude oil imports? Discuss the strategic measures to reduce this vulnerability with suitable examples.

1. Crude oil imports constitute over 20% of India’s total imports, making the economy vulnerable to global price shocks.
2. Rupee depreciation combined with rising oil prices increases import bills and fuels inflation.
3. Dependence on costlier US oil after shifting from cheaper Russian crude raises inflationary and fiscal pressures.
4. Strategic measures include accelerating transport electrification to reduce oil demand.
5. Promoting renewable energy and energy efficiency helps diversify energy sources and reduce import dependence.
6. Examples – Faster adoption of electric vehicles, government incentives for clean energy, and infrastructure development.

4. Comment on India’s current trade policy approach. How do bilateral trade agreements affect the trade balance and economic resilience?

1. India’s trade policy currently emphasizes multiple bilateral agreements aiming to diversify trade routes.
2. Recent agreements with Japan, UAE, and ASEAN have tilted the trade balance against India, worsening deficits.
3. Such deals have not sufficiently addressed structural issues like export diversification and competitiveness.
4. Overreliance on bilateral deals may limit broader multilateral cooperation and market access.
5. A strategic, coherent trade policy focusing on enhancing domestic manufacturing and balanced partnerships is needed.
6. Improving economic resilience requires aligning trade policy with broader industrial and fiscal reforms.