Rupee depreciation: The rupee, Asia’s weakest-performing currency this year, has slipped 4% and is edging toward the psychologically important ₹90 per dollar mark. Policymakers say the pressure is manageable and not unprecedented. That may be true, but the slide has come at a delicate moment, with a long-pending trade agreement with Washington still awaiting final clearance. A breakthrough could ease sentiment, but the underlying drivers go well beyond bilateral diplomacy.
Most emerging-market currencies have struggled this year as global interest rates stay high. The Thai baht, Korean won, and Indonesian rupiah have each lost between 2–3% against the dollar. The rupee’s fall is steeper. The gap matters because it signals that part of the strain is global, but part is specific to India’s external position and market behaviour.
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The broader dollar strength is not new. The US Federal Reserve’s reluctance to cut rates has kept the dollar index elevated, drawing capital into US treasuries at the expense of emerging markets. When global liquidity tightens, currencies with high import dependence and moderate export growth tend to weaken more. India fits that profile.
Rupee depreciation and external vulnerabilities
India’s trade imbalance has widened again with expensive energy imports and uneven export performance. Merchandise exports have not kept pace with import demand, while services exports have softened marginally. The current account deficit (CAD) is expected to rise above 2% of GDP this year, according to several private estimates. That is not alarming, but it leaves less room for policy error.
Short-term external debt—public and private—adds another layer. While India’s overall external debt is moderate relative to GDP, a significant share needs rolling over within a year. In periods of global uncertainty, refinancing becomes costlier. The more dependence there is on short-term flows, the greater the sensitivity to global liquidity cycles. That helps explain why the rupee has underperformed its Asian peers.
Market mechanics magnifying the decline
Offshore traders have built sizable short positions in the rupee. As the currency breached successive support levels, algorithm-driven stop-loss orders accelerated the fall. The Reserve Bank of India (RBI) has opted not to draw a line in the sand. Instead, it has intervened only to smooth volatility.
Foreign-exchange reserves remain large, but usable reserves are lower once forward liabilities and valuation changes are stripped out. Foreign-currency assets have fallen since mid-year, reducing the room for aggressive intervention. The RBI’s stance makes clear that it prefers conserving reserves over defending a predetermined level.
The real effective lens and overdue adjustment
The public debate has focused almost entirely on the nominal rupee-dollar rate. But the more important measure is the real effective exchange rate (REER), which adjusts for inflation and compares India’s currency against a basket of trading partners.
India’s REER has been mildly overvalued for several years, according to RBI data. That means Indian exports have been losing price competitiveness even without nominal appreciation. A modest depreciation can help correct that imbalance. In that sense, part of the current slide is a natural adjustment rather than a crisis signal.
Yet an overshoot is possible if expectations turn one-sided. Export competitiveness improves only if depreciation is steady, not abrupt. Sharp declines raise hedging costs, disrupt supply chains, and create uncertainty for firms with imported inputs.
Inflation knocks on the door
A weaker rupee makes imported goods costlier—whether smartphones, medical devices, chemicals, or packaged foods. The most immediate impact is on petroleum products. With India importing over 85% of its crude, every rupee of depreciation raises the landed cost of oil. Consumers feel it through transport fares, LPG refills, and electricity tariffs.
Students studying abroad and households travelling overseas face even sharper increases. Outward remittances for education and living expenses rise immediately.
Imported inflation is the larger macroeconomic risk. India has just brought retail inflation closer to the upper band of the RBI’s target. A weaker rupee could re-ignite price pressures on edible oils, pulses, and industrial inputs. If inflation expectations drift, the RBI may be forced to delay rate cuts, raising borrowing costs across the economy.
India needs a broader policy toolkit
India’s exchange-rate strategy cannot rely solely on reserve deployment or hopes of a US trade deal. Several domestic policy levers can ease pressure:
First, India must improve the quality of capital inflows. Greater foreign direct investment—especially in manufacturing and high-value services—reduces dependence on volatile portfolio flows. Second, macroeconomic credibility needs strengthening. Fiscal consolidation, predictable policymaking, and clarity on tariff structures improve foreign investor confidence and help stabilise the currency.
Third, the government could incentivise better hedging behaviour. Many Indian firms still carry unhedged foreign currency exposures. Regulatory nudges, risk-based costs, or clearer disclosure norms can reduce systemic risk. Fourth, policy options such as NRI bond issuances or special FCNR deposit schemes—used effectively in 1998, 2000 and 2013—remain available if market conditions deteriorate sharply. They should not be deployed lightly, but keeping them in the policy arsenal reassures markets.
Finally, a sustained push on export competitiveness—through logistics reforms, energy transition, and trade facilitation—offers the most durable defence for the rupee.
India is not facing a balance-of-payments crisis. The fundamentals remain stable and a rebound toward ₹88–88.50 by year-end is plausible if external conditions improve. But the recent depreciation is a reminder that exchange-rate stability cannot be taken for granted.
A currency reflects the sum of domestic strengths and global tides. India can do little about the tightening of US monetary policy. But it can strengthen its external position, improve the quality of capital inflows, and build a policy framework that reduces vulnerability to global cycles.
The latest slide is not a crisis. It is an early warning—and an opportunity to strengthen the foundations before the next shock arrives.