India’s rupee has been on a downward trajectory and has reached an all-time low of 86.63 against the US dollar. Since October 2024, the rupee has fallen 2.2%, and economists suggest that it can hit 88 to a dollar within the next 9–12 months.
So, why is the rupee depreciating? And how does this affect India? Let’s dive deep into the factors, the good, the bad, and what the Reserve Bank of India (RBI) is doing about it.
🤔 💸 Why is the Rupee Weakening?
India’s rupee has been under pressure due to a combination of global and domestic factors. One key driver is India’s widening trade deficit, which surged to a record $37.8 billion in November 2024. This growing gap has fed directly into the current account deficit (CAD), weakening the rupee further.
On the global front, the strengthening US dollar is a major factor.
The US economy is doing well, and investors feel more confident about putting their money there. On top of that, US bond yields are going up because the Federal Reserve isn’t cutting rates as much as expected. This has made US investments more attractive, pulling money out of countries like India, leading to FIIs withdrawing ₹22,194 crores from Indian markets within the first two weeks of January 2025.
Volatile oil prices, fueled by geopolitical tensions such as the Russia-Ukraine war, Middle East crises, and shipping disruptions in the Red Sea, have compounded the issue. Since India imports 88% of its crude oil, the rising oil import bill adds significant pressure on the rupee.
⚠️The Challenges of a Weaker Rupee
A depreciating rupee brings significant challenges for India. Rising import costs for essentials like oil, gas, and food drive inflation and increase transport expenses, placing a strain on households and businesses alike. Sectors heavily reliant on imports, such as energy, electronics, chemicals, and transportation, face rising operational costs. Additionally, companies with overseas debt grapple with higher repayment burdens.
Adding to the challenge, India’s forex reserves fell to $634.59 billion on January 3, 2025—a 10-month low and a $70 billion drop from their September peak. This dip restricts the Reserve Bank of India's ability to effectively intervene in currency markets to stabilize the rupee.
Despite these challenges, there’s a silver lining. The rupee has been one of the most stable currencies in the world. According to a Mint article, the rupee has fallen by about 2.8% against the dollar in 2024, which is much better than many other currencies.
⭐ A Silver Lining
A weaker rupee brings some advantages too:
Foreign investments rise: Lower costs for labour, land, and capital make India a magnet for foreign businesses seeking cost-effective operations.
Remittance boost: With the rupee at historic lows, Indians abroad are sending more money home. In 2024, India saw a record-breaking $129.1 billion in remittances, marking the largest amount ever received by any country in a single year.
Exporters Thrive: Key export-driven sectors benefit from the rupee depreciation. For example, India's IT and export giants are cashing in on the rupee’s fall. To give you some perspective, TCS earned ₹1.1 lakh crore in net forex revenue in FY24, and Reliance Industries Ltd (RIL) earned ₹96,098 crore in net foreign currency earnings. Pharmaceutical sector is another example. Indian drugmakers benefit from exports to the US and Europe, with the rupee’s depreciation making their products more affordable internationally.
🤔 What Is the RBI Doing?
The new RBI leadership hints at a more flexible approach to managing the rupee, moving away from the previous strategy of using over $700 billion in reserves to defend the currency. This approach reduced volatility but led to tighter banking liquidity and higher short-term rates, which negatively impacted growth. In response, the RBI cut the cash reserve ratio by 50 basis points in December and used dollar-rupee swaps to boost liquidity. Despite these efforts, there are calls for further measures to support the economy after two years of unchanged interest rates.
The bottomline
The falling rupee is a double-edged sword for India. While it boosts sectors like IT and remittances, it strains imports and widens the trade deficit. The RBI’s interventions provide temporary relief, but structural reforms are essential for long-term stability. As global economic conditions evolve, India must adapt to maintain growth while managing currency challenges.