Why in news?
By late September 2025 the Indian rupee had depreciated over three percent since the start of the year, touching record lows near ₹88 per US dollar. The Reserve Bank of India and the finance ministry warned that persistent weakness could fuel inflation and widen the current account deficit.
Historical context
The rupee has steadily weakened over the decades, from around ₹3.30 per dollar in 1947 to over ₹80 in recent years. Past crises, such as the 1991 balance‑of‑payments crisis and the 2013 taper tantrum, accelerated depreciation. Structural issues—including high inflation, fiscal deficits and dependence on imported energy—continue to exert downward pressure.
Key causes of the current slide
- Widening trade deficit: Imports of crude oil, gold and electronics far outstrip export earnings, leading to monthly deficits of around $25–30 billion.
- Capital outflows: Foreign investors have sold Indian shares and bonds amid global monetary tightening, preferring the higher yields of US markets.
- Strong US dollar: The US Federal Reserve’s rate hikes have strengthened the dollar against most currencies, making emerging‑market currencies cheaper by comparison.
- Structural weaknesses: India’s manufacturing base is narrow and logistics costs are high. Dependence on imported energy makes the rupee sensitive to oil price shocks.
- Domestic factors: Persistent inflation and worries about fiscal slippages reduce investor confidence, while political uncertainty ahead of elections adds volatility.
Consequences of depreciation
- Higher import costs: Rising prices of fuel, fertilisers and electronic goods feed into broader inflation, affecting households and industry.
- Corporate stress: Firms with foreign currency loans face higher servicing costs, which can squeeze profits and investment.
- Pressure on the current account: A weaker rupee widens the gap between export earnings and import bills, potentially eroding foreign reserves if the central bank intervenes.
- Consumer burden: Overseas travel, education and healthcare become more expensive. Inflation reduces purchasing power.
- Mixed effect on exporters: Exporters may benefit from higher rupee earnings but often rely on imported inputs, diluting gains. IT services and remittances see clearer benefits.
- Tourism and remittances: India becomes cheaper for foreign tourists, and remittances from overseas workers translate into more rupees for their families.
Policy landscape
- RBI’s role: The central bank intervenes selectively to smooth excessive volatility, without defending a particular level. It also adjusts interest rates to manage inflation.
- Fiscal measures: The government has reduced import duties on some commodities, promoted local currency settlement in trade and introduced production‑linked incentive schemes to boost domestic manufacturing.
- Structural reforms: Initiatives to expand renewable energy, improve logistics, deepen bond markets and simplify labour and land laws aim to attract long‑term investment.
- International coordination: India works with G20 partners to address global financial risks and advocates reforms of multilateral lending institutions.
Way forward
- Diversify exports: Develop high‑value sectors such as electronics, pharmaceuticals and chemicals to reduce reliance on raw materials.
- Reduce oil dependence: Invest in renewable energy, public transport and energy efficiency to limit the impact of oil price shocks.