Contents
Introduction
Despite India’s strong 8.2% GDP growth and inflation below 1%, the rupee breached ₹90 per dollar in 2025, reflecting global risk aversion, dollar outflows, widening trade deficit and delayed Indo-US trade negotiations.
Factors Driving the Rupee’s Depreciation
- Persistent Foreign Portfolio Investor (FPI) Outflows: FPIs withdrew ₹1.48 lakh crore from Indian equities since January 2025 (NSDL), treating India as a “liquidity source.” India underperformed major global equity markets, causing capital flight towards higher-yielding US assets. According to the Mundell-Fleming model, in an open economy with flexible exchange rates, capital outflows directly weaken the domestic currency by raising dollar demand. Fall in forex reserves by $12.1 billion (Sept–Nov 2025) signals pressure on the RBI’s intervention capacity.
- Delay in Finalising the India–US Trade Deal: Uncertainty around tariffs and market access has weakened investor confidence. The US imposed 50% tariffs on key Indian exports, hurting export competitiveness. Market participants fear that prolonged delay may widen India’s trade deficit, making the rupee act as the system’s “natural pressure valve.”
- Widening Trade Deficit: Merchandise exports fell 11.8% YoY in Oct 2025 to $34.4 billion. Imports surged 16.6% YoY to a record $76.1 billion. Gold imports tripled to $14.7 billion, driven by festive demand and record prices. As the Elasticity Approach suggests, a deficit widens the demand for USD, weakening INR.
- Sectoral Export Weakness: Oil exports declined 10.5%, non-oil by 12%, engineering goods, textiles, gems, chemicals all contracted. Shrinking demand from the US and EU worsened the external position. Export contraction parallels global slowdown reflected in WTO forecasts of sluggish merchandise trade.
- Rising Gold Prices and Speculative Import Behaviour: Domestic gold at ₹128,000 per 10 grams spurred speculative stocking. Large gold imports distort the current account, pressuring the rupee.
- RBI’s “Soft Touch” Intervention Strategy: RBI intervened minimally, allowing gradual depreciation to keep exports competitive amid tariff disadvantages. With forward book drawn down, RBI is conserving reserves for disorderly volatility. This influenced short-term sentiment, adding to rupee’s slide.
Policy Measures Needed to Stabilize the External Sector
- Finalise and Diversify Trade Agreements: Fast-track India–US trade pact to restore predictability. Expand partnerships via FTAs with EU, UK, EFTA, encouraging tariff-free access. Promote China+1 export diversification.
- Boost Export Competitiveness: Incentivise manufacturing under PLI schemes. Improve logistics using the National Logistics Policy 2022 to lower export costs. Expand export credit under ECGC with risk-mitigation tools.
- Manage Gold Import Volatility: Strengthen Gold Monetisation Scheme, promote digital gold, curb speculative imports through duties or quantitative measures. Encourage formal recycling ecosystem.
- Strengthen Foreign Exchange Buffers: Build reserves through: Sovereign bonds in overseas markets (similar to Japan’s Samurai bonds). Encouraging NRI deposits, bilateral swap lines.
- Attract Long-Term Stable Capital: Promote FDI over FPI, especially in electronics, renewable energy, semiconductors. Simplify regulations, ensure policy certainty, deepen domestic bond markets.
- Improve Domestic Financial Market Depth: Expand rupee trade settlement frameworks with UAE, Russia, Sri Lanka to reduce USD dependence. Promote INR internationalisation, leveraging India’s rising economic size.
- Calibrated RBI Intervention: RBI should smooth volatility while avoiding sharp depletion of reserves. Deploy OMO tools, NDF market intervention, forward purchases to signal stability.
Conclusion
External stability requires credibility and structural resilience. India must combine trade clarity, export strength, capital stability, and calibrated RBI strategy to anchor the rupee.
