Indian rupee keeps losing value

Source: The post Indian rupee keeps losing value has been created, based on the article “RBI’s rupee challenge” published in “Indian Express” on 20th February 2025.

UPSC Syllabus Topic: GS Paper3- Economy

Context: The article discusses the depreciation of the Indian rupee and the RBI’s role in managing it. It explains how market forces, inflation, trade deficits, and capital flows influence the rupee’s value. It warns of risks like currency crises due to volatile capital movements.

For detailed information on Rupee’s Fall Driven by Stronger US Dollar read this article hear

What is the status of Indian Rupee?

1. The Indian rupee has been depreciating steadily over the years. In 2010-11, the exchange rate was ₹45.56 per USD, but by 2023-24, it reached ₹82.78 per USD.
2. The rupee has weakened every year except 2017-18. Since September 2024, its monthly average value has also declined.

What Causes the Rupee to Depreciate?

1. Higher Inflation in India: Inflation in India is generally higher than in international markets. This reduces the purchasing power of the rupee faster than the US dollar. Higher inflation also increases import costs, such as oil, which further weakens the rupee.
2. Trade and Current Account Deficits: India imports more goods and services than it exports. Even large remittances from Indians abroad cannot fill this gap. This forces India to rely on foreign capital inflows to cover deficits and build foreign exchange reserves.

Why Can’t Market-Driven Exchange Rates Stop Depreciation?

1 The rupee’s value depends on capital inflows and outflows. Since India opened its capital account in the 1990s, portfolio investments have been volatile.

2.,Unlike Foreign Direct Investment (FDI) or commercial bank lending, portfolio investments enter and exit quickly, making the rupee unstable.

What Are the Risks of Letting the Rupee Depreciate?

1. Capital Flight: If investors expect the rupee to fall, they may withdraw funds, worsening the depreciation.
2. Foreign Exchange Reserve Drain: The RBI intervenes to control volatility using forex reserves. However, excessive intervention can weaken reserves and investor confidence.
3. Risk of Currency Crisis: Some countries have faced sharp currency collapses in recent decades. India has avoided this, but the risk remains due to the rupee’s history of sudden declines.

What Role Does the RBI Play?

1. The RBI intervenes in the forex market to prevent sudden and significant fluctuations in the rupee’s value.
2. However, its actions can sometimes spur capital outflows if investors expect the rupee to fall sharply, complicating the RBI’s efforts.
3. India’s persistent trade deficits and reliance on volatile capital flows make the economy vulnerable to3. currency crises.
4. Despite the RBI’s efforts to stabilize the rupee, India’s structural economic issues, such as a lack of competitive exports and dependence on foreign capital, pose ongoing challenges to maintaining a stable exchange rate.

Question for practice:

Examine the factors contributing to the depreciation of the Indian rupee and the risks associated with it.