The Indian Rupee’s recent decline, breaching the psychological barrier of 85 against the US dollar, has raised concerns.
On December 27, 2024, the Rupee hit a historic low of 85.8075 per dollar, marking its steepest single-day decline in nearly seven months. While the currency’s fall has been significant, it is essential to view this in the broader context of global economic trends. The Rupee’s current depreciation is less about India’s economic vulnerabilities and more a result of the US dollar’s strength, fueled by strong American economic growth and the Federal Reserve’s hawkish policy approach.
Global investors are seeking refuge in the greenback amid a volatile global environment. This dollar strength has had a ripple effect, impacting most global currencies, including the Rupee. Interestingly, while the Rupee has weakened against the Dollar, it has strengthened against other major currencies like the euro, reflecting its relative resilience within a shifting economic landscape. The Rupee’s decline has been exacerbated by foreign portfolio outflows, a widening trade deficit, and a slowing domestic economy, which recorded its weakest growth in three quarters.
Compounding these challenges, the US Federal Reserve’s recent rate cuts— though less aggressive than anticipated— have bolstered the dollar, putting additional pressure on the Rupee. India’s heavy reliance on imports intensifies the fallout from a weaker currency, driving up costs and pushing inflation higher by an estimated 25-30 basis points. To manage the situation, the Reserve Bank of India (RBI) has been actively intervening in the forex market, utilizing its $658 billion reserves to stabilize the Rupee. However, such measures offer only short-term relief and do not address the root causes of depreciation. A weaker Rupee, while challenging, also presents opportunities for India.
Export-driven industries, such as textiles and pharmaceuticals, stand to benefit from improved price competitiveness in global markets. To maximize these benefits, the government could introduce targeted incentives for these sectors, even if only for shortterm opportunities. Reducing dependency on imports through enhanced domestic manufacturing and productivity would mitigate the adverse effects of a weaker currency. Strengthening domestic production not only eases inflationary pressures but also supports the broader goal of narrowing India’s trade deficit.
The long-term solution to Rupee depreciation and other global challenges lies in fortifying India’s economic fundamentals. This includes scaling up value-added manufacturing, boosting export competitiveness, and ensuring macroeconomic stability. Trade competitiveness depends not just on the Rupee’s value against the US dollar but also on its performance relative to other currencies. Keeping a close eye on the policies and currency movements of major economies like the US and China is critical, as their trade dynamics directly affect India’s economy. While the RBI’s interventions and substantial reserves offer a temporary buffer, lasting stability requires structural reforms. These should focus on attracting steady foreign investment, upgrading infrastructure, and streamlining regulations to instill greater confidence in India’s economic future.
The Rupee’s depreciation serves as a reminder of the need for India to build an economy resilient to external shocks. The RBI’s role must extend beyond short-term forex interventions, adopting a calibrated monetary policy that balances inflation control with growth support. Encouraging domestic capital formation, ensuring credit access for export-oriented industries, and vigilantly addressing external vulnerabilities are critical steps. T
he forthcoming Union Budget presents an opportunity to introduce enabling policies that drive long-term growth and stability. A robust and stable economy is not only the key to mitigating the effects of a weaker Rupee but also to securing sustainable growth in an increasingly unpredictable yet interconnected global environment.
Dr. Srinath Sridharan is a Corporate advisor & Independent Director on Corporate Boards. He tweets as @ssmumbai
