DM Deshpande
The news of the Rupee breaching Rs 90 per US Dollar is making rounds in the media. The Indian currency does lose value vis-a-vis the dollar generally but the fall this year has been rather steep.
In 2025 so far, the rupee has slid by more than five per cent, making it one of the worst performers in the emerging markets. To be precise, the year-to-date decline is 5.3 per cent. And hence there is some concern in certain quarters though the RBI does not seem to be perturbed much.
While the apex bank has reduced repo rate by 25 basis points to combat high tariffs of the US. It has now taken a stand not to intervene in the market by way of selling dollars. A deeper analysis of the reasons that have led to the rupee depreciation is therefore in order.
The exchange rate is an interplay of demand and supply factors, just as in case of prices of other goods and services. There are, however, other causes that contribute to the decline beyond fundamental mismatch in demand and supply forces. While the demand for dollars has gone up, the supply of the hard currency has taken a hit in India.
The widening trade gap, which reached a staggering $42 billion in October (compared to $32 billion in September) is one of the foremost reasons why dollars have dried up. Exports growth has been sluggish for quite some time due to the levy of 50 per cent tariff by the US.
Ironically, for a country of India’s size, we export very few sophisticated goods and services. On the other hand, we import high input value merchandise. The trade deal with the US is likely to be finalised in 2025 but the delay is impacting the sentiments adversely. However, the trade deficit has shot up mainly due to imports of gold; demand for the yellow metal has a higher demand during festive and marriage season.
It is a double whammy for India. Inflows of dollars have been hit. FDI inflows have not been encouraging. Even more worrying is the withdrawal of FII’s from Indian capital markets. It is estimated that they have sold securities worth $17 billion this year. This has resulted in shortage of supply of dollars in India.
The policy response by the RBI is to intervene directly in the currency market. It has released $ 40 billion from its reserves to prevent wide fluctuations in rupee value. The problem is that it is almost impossible to hold the currency price artificially for a long time. Further, it sucks rupee resources creating problems of domestic liquidity. This is hardly desirable when the RBI is keen on reducing rates to prop up growth of the economy.
Of late, however, the RBI is not active in the market allowing the rupee to find its own value. Rupee depreciation is being seen as a cushion against high tariffs by the U.S on India. While India faces steep levy, competitors like China, Vietnam and Bangladesh, among others, enjoy a price advantage over India.
Due to fall in rupee, imports become costlier. India imports 85 per cent of its crude oil requirements from abroad. However, three factors are in India’s favour. One, global oil prices have settled at around $63 to $64 per barrel. Second, domestic inflation at 0.2 per cent is at a record low. Hence, it will not be a problem to absorb some imported inflation. Third, oil prices have not been lowered earlier when they declined in global markets. That is why, even with higher imported rupee costs, pump prices have not been revised upwards. Hence, even if global prices rise it will not immediately impact retail prices in India.
Challenges to rupee value are to be seen in the context of changing geopolitical scenarios and shifts in global supply chains. India has been astute in handling de-dollarization. It has entered into Rupee trade agreements with the UAE and Russia but it has maintained a low profile.
As a result, it reduces the pressure on the Indian rupee. The government of India and India Inc. have been actively promoting India in ‘China plus one’ strategy. As the WTO is no more effective, bilateral trade and agreements have filled the void. India has entered into crucial trade pacts with the UK, UAE and the EU. And with the U.S the pact is in the pipeline. After a time lag, this will result in higher exports and earnings.
Remittances from overseas have helped the economy to tide over temporary corrections in foreign exchange markets. A large Indian diaspora sent the highest ever remittance of $135.5 in FY25 up from $118.7 billion in the previous year. As the rupee weakens, it boosts NRI deposits. The falling rupee gives a huge incentive for more remittances from abroad.
In the medium and long term, there is not much to worry about challenges to rupee value. Current account deficit is an indicator of how import payments are being taken care of by export earnings. This has narrowed down considerably in 2024-25 to 0.7% of GDP. In 2013 it was above 5% and the foreign exchange reserves were just half of what we have in the kitty now. At about $700 reserves, India is able to breathe easily since it is sufficient to cover imports of 11 months.
However, right now Rupee faces issues because of sudden spike in trade deficit, uneasy inflow of forex resources and large withdrawals by FII’s from Indian stock markets. India needs to act quickly on trade pacts, address issues of ease of doing business and reduce effective interest to boost investment.
The author has four decades of experience in higher education teaching and research. He is the former first vice-chancellor of ISBM University, Chhattisgarh
