The Depreciation of the Indian Rupee
The Indian rupee has been on a depreciation trajectory in recent months. Its value against the US dollar has surpassed 85, influenced by various factors such as currency market demand and supply dynamics. Increased imports raise the demand for US dollars, while foreign investors may withdraw funds due to inflation concerns or better returns elsewhere. Political factors like tariffs and trade restrictions also impact currency demand. Recently, the rupee weakened by 22 paise to 87.41 against the US dollar in early trading on Thursday, February 27, 2025, following a US tariff announcement that put pressure on emerging market currencies, including the rupee.
Factors Behind the Falling Rupee
The rupee’s depreciation has outpaced domestic inflation in India. Inflation erodes the rupee’s purchasing power, reducing consumers’ ability to afford goods and services. The strength of the US dollar is driven by high global demand, Federal Reserve policies (such as interest rate hikes), its status as a safe-haven currency, a robust US economy, and the global reliance on the dollar for trade, particularly for oil transactions.
Rising global crude oil prices are a significant factor in rupee depreciation. India, being a net importer of oil, faces higher import costs when oil prices surge, increasing the demand for US dollars to pay for imports. This weakens the rupee against the dollar. Additionally, a trade deficit occurs when a country imports more goods and services than it exports, driven by high domestic consumption, a strong currency making imports cheaper, rapid economic growth, and a reliance on essential imports like oil and technology.
Global economic uncertainties further contribute to rupee depreciation by reducing demand for Indian exports and prompting foreign investors to shift their funds to safe-haven currencies like the US dollar.
Impact of Rupee Depreciation
US policy concerns, such as potential import tariffs, deportations, and tax cuts, could increase inflationary pressures, prompting the Federal Reserve to maintain a tight monetary policy. High import costs drive inflation by raising the prices of goods and materials, reducing consumer purchasing power, and increasing production costs. This, in turn, could slow economic growth, widen the trade deficit, and weaken the domestic currency further. Additionally, higher US interest rates and bond yields make US assets more attractive to global investors, increasing the demand for the US dollar and strengthening its value.
While rupee depreciation can boost exports by making Indian goods cheaper and more competitive in global markets, it also presents challenges such as higher inflation and increased debt servicing costs. The Reserve Bank of India (RBI) faces difficulties in stabilizing the rupee. While selling foreign exchange reserves can provide short-term relief, excessive intervention could deplete reserves. A weaker rupee increases import costs, particularly for oil, leading to inflation. Foreign investors may withdraw funds, causing further depreciation, while raising interest rates to attract investment could slow economic growth.
Students planning to study abroad are also affected, as the depreciating rupee makes foreign education more expensive. They now need to pay more rupees for every dollar charged by foreign institutions. Similarly, the rupee’s depreciation impacts the stock market—export-oriented companies may benefit, but businesses reliant on imports face higher costs. Inflation could rise, affecting consumer spending and economic growth.
In the real estate sector, a weaker rupee increases costs for raw materials, labour, and transportation, impacting project budgets and timelines. However, a depreciating rupee makes Indian real estate more attractive to non-resident Indians (NRIs), particularly those in the Middle East, where currencies are typically pegged to the US dollar. Developers have noted increased inquiries and property purchases by NRIs. Despite rising construction costs and loan rates, rupee depreciation has boosted NRI and foreign investment in Indian real estate. Commercial properties, particularly in export-driven sectors, benefit from increased demand. Strategic policies can help turn this challenge into long-term growth for the industry.
Government Measures to Counter Rupee Depreciation
The Indian government is taking various measures to support the rupee and strengthen the economy. Export promotion initiatives like the Production-Linked Incentive (PLI) scheme have boosted India’s merchandise exports, which grew by 10.3% year-on-year in November 2024. The Union Budget introduced an Export Promotion Mission with an allocation of ₹2,250 crore to facilitate easier access to export credit, cross-border factoring support, and assistance for MSMEs in tackling overseas market challenges.
The government has also implemented schemes to financially support exporters. The Remission of Duties and Taxes on Exported Products (RoDTEP) scheme reimburses taxes and duties that exporters incur, making Indian goods more competitive in global markets. To further support domestic manufacturing, the government has reduced basic customs duty on raw materials like leather, plastic sheets, and chemicals while increasing duty rates on finished goods like interactive flat panel displays.
Funding for domestic manufacturing has been significantly increased in the 2025-26 budget, with an 89% rise to ₹16,092 crore for initiatives such as the National Manufacturing Mission and the creation of National Centres of Excellence in Skilling.
To modernize the financial system and drive economic growth, the government and RBI are actively promoting digital payments. The Payment Vision 2025 aims to create a secure and inclusive digital payment ecosystem, integrating all government transactions through platforms like Kuber. The expansion of UPI and RuPay is being encouraged, particularly in rural and semi-urban areas, to reduce cash dependency. Digital payments contribute to economic stability by increasing tax revenue, reducing black money circulation, and improving financial transparency, which in turn attracts foreign investment.
Additionally, the government is prioritizing bilateral trade agreements in 2025 to mitigate the effects of rupee depreciation. Strategic partnerships with major economies such as the US, UK, and EU are expected to enhance trade and investment opportunities. Free Trade Agreements (FTAs) are being pursued to increase market access for Indian goods and services. Bilateral trade is seen as a key driver of economic growth, attracting foreign investment and creating job opportunities.
Conclusion
Managing currency fluctuations is crucial for a country like India, where economic growth and global trade play a significant role. The government and RBI must focus on strengthening domestic production, reducing dependence on imports, and attracting stable foreign investments. A balanced approach can help India harness the benefits of a weaker rupee while minimizing its negative effects.
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