Depreciation of the Indian Rupee: Causes, Implications and Policy Responses
Context: The Indian Rupee recently breached the psychologically important 92-mark, falling to 92.17 against the US Dollar. The depreciation has been driven mainly by rising geopolitical tensions in West Asia, particularly the Iran conflict, and a nearly 10 percent surge in global crude oil prices, raising concerns about inflationary pressures and current account stability in India.
Introduction:
Exchange rate movements play a crucial role in determining a country’s macroeconomic stability. The recent depreciation of the rupee reflects the interaction of global geopolitical tensions, oil price volatility, capital flows, and external sector imbalances, making it an important issue for India’s economic policy and external sector management.
Meaning of Rupee Depreciation: The sliding of the rupee refers to a decline in the value of the Indian currency relative to the US Dollar. In a market-based exchange rate system, this means more rupees are required to purchase one dollar, making imports more expensive while improving the competitiveness of Indian exports.
Exchange Rate Determination: The value of the rupee is largely determined by demand and supply of foreign currency in the forex market. Demand for dollars arises from imports, overseas investments, and debt payments, while supply comes from exports, remittances, and foreign investments.
Role of Current Account Balance: A higher trade deficit, where imports exceed exports, increases the demand for dollars and puts downward pressure on the rupee. Rising import costs, particularly for energy and electronics, contribute to currency depreciation.
Role of Capital Flows: Foreign Direct Investment and Foreign Institutional Investment inflows strengthen the rupee, whereas capital outflows weaken it. During periods of global uncertainty, investors tend to withdraw capital from emerging markets.
RBI Exchange Rate Management: India follows a managed floating exchange rate system where the Reserve Bank of India intervenes in the forex market using its foreign exchange reserves to reduce excessive volatility and maintain stability.
Rising Global Crude Oil Prices: India imports nearly 80 percent of its crude oil requirements, making the rupee highly sensitive to oil price fluctuations. The recent rise in Brent crude prices by around 10 percent due to tensions in the Strait of Hormuz region has significantly increased India’s import bill.
Geopolitical Risk and Safe Haven Demand: Escalating tensions in West Asia and the Iran conflict have increased global risk aversion. Investors have shifted funds to safe-haven assets such as the US Dollar and Gold, weakening emerging market currencies including the rupee.
Foreign Portfolio Investment Outflows: During the first week of March 2026, Foreign Institutional Investors turned net sellers in Indian equities, leading to capital outflows and increased demand for dollars in the foreign exchange market.
Risk to Remittance Flows: The Gulf Cooperation Council region accounts for a large share of remittances to India, exceeding 100 billion dollars annually. Prolonged instability in the region could disrupt these inflows and reduce the supply of foreign currency.
Widening Current Account Deficit: India’s Current Account Deficit rose to about 13.2 billion dollars, or 1.3 percent of GDP in the third quarter of FY 2025–26, reflecting higher import expenditure and external sector pressures.
Imported Inflation: A weaker rupee raises the cost of imported commodities such as crude oil, fertilizers, and electronic components. This leads to higher transportation, manufacturing, and consumer prices, contributing to inflation.
Impact on Energy Intensive Industries: Industries such as aviation, logistics, chemicals, and paints face rising operational costs because of expensive imported fuel and raw materials, affecting profitability.
External Debt Burden: Companies with External Commercial Borrowings denominated in dollars face higher repayment costs when the rupee depreciates. India’s outstanding ECBs were about 44.36 billion dollars as of December 2025, increasing repayment pressure.
Export Sector Advantage: Export oriented sectors such as information technology services and pharmaceuticals may benefit because dollar revenues convert into higher rupee earnings, improving profit margins.
Way Forward through RBI Intervention: The Reserve Bank of India can use its foreign exchange reserves of over 600 billion dollars to intervene in the forex market and prevent excessive currency volatility.
Monetary Policy Vigilance: The Monetary Policy Committee may adopt a cautious stance on interest rates to contain inflationary pressures arising from imported price increases.
Energy Diversification Strategy: Reducing reliance on imported crude through renewable energy expansion, domestic production, and diversified oil sourcing can lower structural pressure on the rupee.
Strengthening Capital Inflows: Policies that encourage stable long-term foreign investments in infrastructure, manufacturing, and government bonds can increase foreign currency inflows.
Boosting Domestic Manufacturing: Expanding initiatives such as the Production Linked Incentive scheme can reduce dependence on imported intermediate goods and improve India’s trade balance.
Conclusion:
The recent fall of the rupee beyond the 92 per dollar level reflects the combined impact of global geopolitical tensions, energy price volatility, and external sector imbalances. While export sectors may experience short-term gains, the broader risks of imported inflation, rising external debt costs, and macroeconomic instability remain significant. Ensuring long-term currency stability requires diversified energy sources, stronger domestic manufacturing, and sustained foreign investment inflows, highlighting that a stable rupee is essential for maintaining India’s economic resilience.
Source : Indian Express