Is the falling rupee a cause for alarm?

Source: The post “Is the falling rupee a cause for alarm?” has been created, based on “Is the falling rupee a cause for alarm?” published in “Times of India” on 12th December 2025.

UPSC Syllabus: GS Paper-3- Indian Economy

Context: The Indian rupee has recently slipped below the ₹90 per dollar mark, prompting concerns about external stability and macroeconomic fundamentals. Such currency movements, however, reflect multiple factors including global conditions, investor behaviour, and domestic economic parameters rather than a single structural weakness.

Reasons Behind the Fall of the Rupee

A. Weakening External Fundamentals

1. The trade deficit has widened because India’s import growth has been consistently higher than export growth.
2. The current account deficit has expanded due to higher import bills and weak global demand for exports.
3. Foreign Portfolio Investors (FPIs) have withdrawn funds as they expect better short-term returns in other economies.
4. Foreign exchange reserves have declined slightly, which indicates that the RBI’s interventions have remained limited.

B. Policy and Sentiment Factors

1. Uncertainty surrounding the India–U.S. tariff agreement has adversely affected investor sentiment.
2. Elevated valuations in domestic equity markets have encouraged foreign investors to book profits and exit.
3. Global currency trends have favoured the U.S. dollar in the short term, putting additional pressure on emerging market currencies including the rupee.

Whether the Falling Rupee Indicates Weakness in the Economy

1. The depreciation of the rupee does not indicate structural weakness because India continues to record robust GDP growth.
2. Inflation in India remains moderate, supported by an accommodative monetary policy stance.
3. India’s foreign exchange reserves still cover around 11 months of imports, indicating a strong external buffer.
4. Fiscal consolidation is progressing as planned, and capital expenditure remains strong, which shows that macroeconomic fundamentals are stable.
5. The fall of the rupee is driven mostly by transient global and sentiment-driven factors rather than domestic economic deterioration.

Benefits of a Depreciating Rupee

1. The depreciation of the rupee increases the price competitiveness of Indian goods, thereby helping exports gain market share.
2. The weaker rupee partially offsets the tariff-related disadvantages arising from recent U.S. policy measures.
3. Services exporters, especially IT and business-process firms, gain higher rupee realisation on dollar earnings.
4. Increased profitability in the services sector may translate into higher employee bonuses and support domestic consumption.
5. The inflationary impact of depreciation remains modest, as a 5% fall contributes only 0.3%–0.4% to the Consumer Price Index.

Downsides of a Depreciating Rupee

1. Import costs rise significantly, especially for crude oil, electronics, fertilisers, and heavy machinery, as more rupees are needed to buy the same dollar value.
2. Rupee volatility creates uncertainty for exporters and importers, complicating hedging strategies and long-term business contracts.
3. The government faces higher subsidy bills, particularly on fertilisers and fuel, which may exert pressure on fiscal balances.
4. Sectors dependent on imported inputs face compressed margins due to increased operational costs.

Challenges Arising from the Rupee’s Fall

1. The rising import bill increases the cost burden on industries and the government, especially in energy and fertiliser sectors.
2. Imported inflation could gradually rise if depreciation continues, affecting fuel, metals, and essential commodities.
3. Fiscal stress may increase as subsidy expenditure rises, making fiscal consolidation more difficult to achieve.
4. Currency volatility disrupts business planning for exporters and importers and enhances financial risks.
5. India remains vulnerable to shifts in global investor sentiment because of reliance on volatile FPI flows.
6. A persistent trade imbalance threatens to widen the current account deficit further.
7. The RBI has limited flexibility because excessive intervention may drain reserves while minimal intervention may permit undue volatility.
8. Companies with dollar-denominated loans face higher repayment burdens, thereby increasing financial stress.

Way Forward

1. India must strengthen its external sector by diversifying exports, enhancing competitiveness in high-value manufacturing, and deepening services exports.
2. The government should work to attract more stable long-term Foreign Direct Investment (FDI) by improving the ease of doing business and ensuring policy consistency.
3. Reducing import dependence through domestic production of critical items such as semiconductors, electronics, and defence equipment is essential.
4. Expanding renewable energy capacity will help reduce oil imports and ease pressure on the rupee.
5. The RBI should continue to intervene only to curb excessive volatility rather than defend a specific exchange rate level.
6. Macroeconomic stability should be maintained by adhering to fiscal consolidation targets and keeping inflation within the target band.
7. Exporters and importers, especially MSMEs, should be encouraged to use hedging instruments to manage currency risks more effectively.
8. The government and RBI must improve communication and provide policy clarity to reduce speculation and maintain investor confidence.
9. Fast-tracking pending trade agreements can help stabilise investor sentiment and boost long-term export prospects.

Conclusion

The recent fall of the rupee is largely driven by global portfolio movements and temporary sentiment-related factors rather than fundamental economic weakness.Although depreciation offers some export advantages, it also brings challenges related to higher import costs, fiscal pressures, and business uncertainty. With strong macroeconomic fundamentals and prudent RBI interventions, the situation calls for careful monitoring rather than alarm, supported by structural reforms and stable long-term policies.

Question: The recent fall of the rupee below ₹90 per dollar has triggered debates on economic stability. Discuss the reasons behind the depreciation, its impact on the Indian economy, associated challenges, and the way forward.