Reference Article: Editorial | The Hindu – Limited room: On the Indian rupee
UPSC Relevance:
– GS III – Indian Economy, External Sector, Monetary Policy, Trade
The rupee has depreciated by about 7% between Nov 2024–Nov 2025, sliding from ₹83.4 to ₹89.2 per dollar, echoing pressures last seen in 2018.
Key Drivers of Depreciation
- Global macroeconomic stress: stronger U.S. dollar, elevated U.S. interest rates, and tariff-induced volatility.
- Trade shocks: U.S. tariffs have weakened India’s export competitiveness.
- Widening Current Account Deficit (CAD): driven partly by a surge in gold and silver imports as hedges against uncertainty.
- Shift in oil sourcing: reduced Russian crude purchases and greater reliance on costlier U.S. imports.
RBI’s Stabilisation Measures
- Managed float regime allows only “volatility smoothing,” not exchange-rate fixing.
- Heavy forex intervention: net sale of $50 billion since Nov 2024.
- Long-term liquidity support:
- 2019: $5 bn swap
- 2025: $10 bn buy-sell swap
- Outcome: despite interventions, external pressures have outweighed RBI actions.
Macroeconomic Cushion
- Forex reserves remain strong at ~$693 billion, providing confidence against disorderly depreciation.
- Inflation comfort: CPI fell to 0.25% in Oct 2025 — well below the 2–6% target band, giving RBI policy space.
- Domestic stability: low inflation helps avoid sharp rate hikes even as the rupee weakens.
Policy Concerns
- Oil dependence remains India’s structural vulnerability:
- Crude comprises over 20% of imports.
- Depreciation + costlier oil risks future inflation build-up.
- Trade policy misalignment:
- India’s reliance on fragmented bilateral trade deals (Japan, UAE, ASEAN) has tilted trade balances negatively.
- Diversification of trade routes remains inadequate.
Way Forward
- Strategic energy transition:
- Accelerate electrification of transport.
- Expand renewable capacity to cut oil import dependence.
- Coherent trade strategy:
- Move from ad-hoc bilateral deals to long-term, diversified trade partnerships.
- Strengthen competitiveness of domestic manufacturing and exports.
- Macro-prudential preparedness:
- Continue RBI’s calibrated interventions.
- Address gold import surge with stronger financial instruments for hedging.
- Improve export ecosystem to mitigate tariff shocks.
Conclusion
The rupee’s sharp depreciation reflects structural vulnerabilities deepened by global shocks. While the RBI’s role is limited, India’s long-term resilience requires reducing oil dependence, strengthening trade strategy, and addressing recurring external-sector fragilities.