The value of the rupee has been fluctuating for the past few months. On March 24th, 2025, the rupee reached a low of 85.99 against the dollar. Why is this happening? The value of the rupee falls in two ways. One is devaluation of the rupee. This is a deliberate decrease in the official exchange rate of the rupee against other currencies. This is called devaluation. This happened on three occasions in the years 1949, 1966, and 1991. The other is the depreciation of the rupee against the dollar due to fluctuations in international trade. The rupee’s value decreases against the dollar due to economic fluctuations.
This indicates a depreciation of the rupee. Why is the value of the Indian rupee falling now? The main reasons for this are global factors such as the Russia-Ukraine war, the Israel-Palestine war, rising crude oil prices, selling of equities, dollar inflows, RBI’s actions to tighten monetary policy and tightening global economic conditions. The rupee’s exchange rate against the dollar has fluctuated for several years in history. In 1947, the rupee-dollar rate was Rs. 3.30, in 1966 it was Rs. 7.50, and by 1995 it was Rs. 32.4. In 2022, it was Rs. 82.14 per dollar. The rupee’s value has fallen due to many factors such as wars with Pakistan and China, five-year plans that require foreign loans, political instability, and oil prices. The ongoing trade war between the US and China, sanctions on Iran, and further volatility in oil prices continue to test the value of the rupee.
Considering the impact of the rupee depreciation, it is a double-edged sword for the Reserve Bank of India. On the positive side, a weak rupee theoretically has some positive aspects such as boosting India’s exports and making travel to India cheaper; local industry can benefit. People working abroad can earn more by sending money back to their home countries. This helps reduce the current account deficit by exporting more. On the negative side, there is also the risk of inflation. It makes it difficult for the central bank to keep interest rates at record levels for a long time, as India meets more than two-thirds of its domestic oil needs through imports. A weak currency can further increase the prices of imported edible oil. This leads to higher food inflation. The country’s current account deficit increases due to the falling purchasing power of the rupee and higher payments. Foreign travel, foreign education become more expensive. The interest burden on foreign debt, etc. increases.
Impact on the Indian economy
The sharp decline in the domestic unit comes after the rupee depreciated by nearly 3 percent against the dollar in 2024, the lowest level among Asian currencies. On January 1, 2024, the rupee was at 83.21 against the greenback (a slang term for paper dollars). Nomura expects it to fall to Rs. 87 against the dollar by mid-2025. According to analytical estimates, the rupee is expected to fall to ₹89.1037 against the dollar by the end of 2025 and ₹101.5491 by the end of 2029. The rupee-dollar exchange rate is also expected to be volatile in the near term due to factors such as the trade deficit, a decline in foreign portfolio investment, and a strengthening US dollar index. The US central bank has predicted that the rupee may weaken due to increased demand for the dollar amid US Fed rate hikes and geopolitical uncertainty. Generally, net exporters receive more rupees for their dollars. So net importers have to pay more to buy dollars for imports. Those with large amounts of foreign debt also see interest costs in rupees. Devaluation leads to some consequences in the economy.
India exported about 723 billion Indian rupees worth of medicines and pharmaceuticals to the United States in fiscal 2024, the highest value of exports in the sector. The textile industry, which is a net exporter, will benefit from the weak rupee, but industry sources say the gains may be short-lived as consumers demand revised rates in upcoming orders. As for the gems and jewellery sector, the depreciation of the rupee is giving its units a cost advantage. The information and technology (IT) services industry contributes more than 50% to the United States’ revenues. It will also be one of the biggest beneficiaries of the depreciating rupee. For every 1% fall in the garment sector’s profits, profits will increase by 0.25-0.5%. India’s tea exports are expected to increase by 5-10%. While petroleum products, organic chemicals, automobiles and machinery are India’s major exports, increasing the competitiveness of Indian tea in the world will encourage more exports.
With rising commodity prices due to high imports and supply shortages, the cost of production for exporters increases, which affects their profits. Foreign investors pulled out Rs 22,194 crore from Indian equities till January 10 due to weak earnings, a strengthening dollar and concerns about tariff policies during the Donald Trump administration. India’s crude oil import bill is expected to increase by eight to nine percent (at constant crude prices) due to the depreciation of the Indian rupee against the United States dollar (USD), an Investment Information Credit Rating Agency (ICRA) report said. Reflecting the RBI’s heavy intervention (selling of dollars in the spot and forward markets) in the forex market, the country’s foreign exchange reserves fell by $51.52 billion to $630.607 billion as of February 1, 2025. The rupee’s decline is further exacerbated by reduced capital inflows, a widening trade deficit, and slowing economic growth in India.
Other currencies versus the dollar
Many currencies have been fluctuating against the US dollar. As a result, foreign capital inflows from various emerging economies, including India, have put pressure on their domestic currencies. The rupee’s decline against the US dollar has been less than that against other major global currencies such as the euro, British pound, and Japanese yen. Finance Minister Nirmala Sitharaman said that the Indian rupee has depreciated only against a strengthening US dollar, but has remained stable against other strong macro-economic factors. Currencies of some developed economies have fared much worse. The euro has fallen sharply from its peak above 1.12 in September 2024, representing a 9% decline in three months. By January 2025, the Japanese yen had fallen by 16% and the British pound sterling by 0.8%. As a result, the rupee appreciated against these currencies. The South Korean won, Philippine peso, Thai and Taiwanese dollars depreciated more than the rupee against the US dollar due to domestic political and economic factors.
Reserve Bank of India steps to curb rupee depreciation
The Reserve Bank of India (RBI) should take action during a rupee depreciation. Reducing speculation is a basic rule of foreign exchange trading when looking at how the RBI can control the depreciation of the Indian currency. Banks should limit borrowing, as banks are forced to look to market loans for funds, yields fall, attracting more buyers, including foreign institutions. The Reserve Bank should intervene in the forex market, sell non-resident Indian bonds. And conduct sovereign bond (government securities issued by the Reserve Bank of India) issuance.
India should focus on reducing its overall current account deficit and formalize the rupee payment system with friendly countries like Russia. This will pave the way for reducing the rupee’s dependence on the US dollar. Industrial growth should be prioritized, so that the sale of goods requires rupee exchange, which will eventually lead to institutionalization in international markets. It is also essential to formalize the Indian economy by curbing black money transactions in rupees. Therefore, to restore the multilateral nature of the rupee, we need to increase the use of the rupee in international markets. So the only cure for currency depreciation is economic development.
Can the world find an alternative to the dollar?
The United States is the most flexible financial market, not only because of network effects, but also because the dollar is difficult to exchange for other countries, especially China. America has the clearest, most transparent corporate governance, with minimal discrimination between domestic residents and foreigners. The global trading system is highly unbalanced, with many large economies, including China, Germany, Japan, and Russia, struggling with unequal income distributions, which have reduced domestic consumption. They have forced their savings rates down. Weak consumption leads to weak investment. These economies need continuous trade surpluses to replace the excess production that drives their economies. But surplus economies need to acquire foreign assets in exchange for their surpluses. This is where the United States, Britain (UK), Australia, Canada, New Zealand, and other Anglophone economies with similar markets play their most important role.
They allow foreigners unlimited access to local assets. In other words, they are the only major economies willing to run permanent trade deficits to meet the needs of countries with foreign surpluses to acquire foreign assets. No other major economy can accept this burden. This explains why the dollar continues to be the dominant currency, despite decades of complaints from the international community. More importantly, Japan and the European Union (EU), along with the most advanced, non-Anglophone economies, run permanent surpluses themselves, so they cannot absorb the surpluses of countries like China and Russia. According to the International Monetary Fund (IMF), more than 61% of the world’s currency reserves are in dollars, making it very difficult to replace the US dollar.
