Why the Indian Rupee Is Falling: Key Reasons & Its Impact on India's Economy

Introduction

The Indian Rupee (INR) has been depreciating continuously, raising concerns among policymakers, businesses, and common citizens. The falling Rupee affects multiple aspects of the economy, from import costs and inflation to foreign investments and economic growth.

Understanding the reasons behind the depreciation of the Rupee is crucial, as it helps individuals and businesses plan their financial decisions accordingly. This article provides an in-depth analysis of why the Rupee is falling, its impact on the Indian economy, and possible measures to stabilize it.

---

Understanding Currency Depreciation

Before diving into the causes, let’s understand what currency depreciation means. When the value of a country’s currency declines relative to another currency, particularly the US Dollar (USD), it is called currency depreciation.

For example, if ₹1 was equal to $0.014 earlier, but now ₹1 is equal to $0.012, the Rupee has depreciated. This means it requires more Rupees to buy one US Dollar, making imports expensive.

Several factors influence the exchange rate, including demand and supply of foreign currencies, inflation, trade balance, interest rates, foreign investments, and global economic conditions.

---

Why Is the Rupee Falling? Major Reasons Explained

The continuous depreciation of the Rupee is caused by a mix of global and domestic economic factors.

1. Widening Trade Deficit and High Import Bills

India has a trade deficit, meaning it imports more goods than it exports. A high trade deficit increases the demand for US Dollars, causing the Rupee to weaken.

A major contributor to this deficit is India’s dependence on crude oil imports, as the country imports over 80% of its oil requirements. When oil prices rise in the international market, India has to pay more in Dollars, leading to higher demand for USD and weakening the Rupee.

Additionally, India imports large quantities of electronics, gold, and machinery, which further increases the trade imbalance. If exports do not grow at the same pace, the Rupee remains under pressure.

2. Strengthening of the US Dollar in Global Markets

The US Dollar is the world’s most widely used reserve currency, and any strengthening of the Dollar weakens other global currencies, including the Rupee.

When the US Federal Reserve increases interest rates, global investors move their money toward US assets, as they provide higher returns. This leads to a demand for the US Dollar, which strengthens it and causes emerging market currencies like the Rupee to depreciate.

Moreover, during times of economic uncertainty, investors seek safer assets, and the US Dollar is considered a “safe-haven currency.” This further weakens the Rupee.

3. Foreign Portfolio Investment (FPI) Outflows

Foreign investors play a significant role in India’s stock markets. When these investors pull their money out of India, they convert their Rupee holdings into US Dollars, increasing demand for the Dollar and pushing the Rupee down.

Foreign investors exit India due to reasons such as:

• Rising interest rates in the US, making US assets more attractive.
• Economic concerns and slow growth projections in India.
• Global uncertainties and geopolitical risks, leading investors to prefer stable markets.

4. High Inflation and Fiscal Deficit

Inflation reduces the purchasing power of a currency. When inflation is high in India, the value of the Rupee declines because it takes more money to buy the same goods and services.

Additionally, India has a high fiscal deficit, which means the government spends more than it earns. To cover this deficit, the government borrows money, increasing the money supply in the economy and leading to further depreciation of the Rupee.

5. Declining Foreign Exchange Reserves

The Reserve Bank of India (RBI) plays a crucial role in managing currency fluctuations. It often intervenes by selling US Dollars from its foreign exchange reserves to stabilize the Rupee.

However, continuous intervention leads to a decline in India’s forex reserves, which weakens the country’s ability to defend the Rupee over the long term.

6. Global Geopolitical and Economic Uncertainty

Global events have a significant impact on the Rupee. Some of the recent factors contributing to volatility include:

• The Russia-Ukraine conflict, which has disrupted global energy markets and increased crude oil prices.
• The US-China trade tensions, which have created uncertainty in global trade.
• The Middle East conflicts, which have caused fluctuations in oil supply and prices.
• The global economic slowdown, which has led investors to move capital away from emerging markets.

---

Impact of Rupee Depreciation on the Indian Economy

A weakening Rupee has both positive and negative impacts on the Indian economy.

1. Higher Inflation and Expensive Imports

A depreciating Rupee makes imported goods more expensive. Since India imports crude oil, electronics, machinery, and raw materials, businesses have to pay more in Rupees to buy the same quantity of goods. This leads to higher costs for consumers, increasing inflation.

Transportation and logistics costs also rise due to higher fuel prices, leading to an overall increase in the cost of living.

2. Increased Foreign Debt Burden

Many Indian companies and the government borrow money from international lenders in US Dollars. A weakening Rupee makes repaying this foreign debt more expensive, increasing financial stress on businesses and the economy.

3. Mixed Impact on Indian Exports

A weaker Rupee benefits exporters, as Indian goods and services become cheaper in international markets. This can boost exports of IT services, textiles, and pharmaceuticals.

However, industries that rely on imported raw materials suffer as their production costs rise.

4. Volatility in Stock Markets

Foreign investors pull money out of Indian markets when the Rupee weakens, leading to stock market fluctuations. Sectors like IT and Pharma tend to benefit since they earn in Dollars, but banking, aviation, and oil-dependent industries struggle.

5. Impact on Forex Reserves

The RBI often sells Dollars from its forex reserves to stabilize the Rupee. However, this depletes the reserves, reducing India’s ability to manage future currency fluctuations.

---

Measures to Stabilize the Rupee

1. RBI’s Intervention in the Forex Market

The RBI sells US Dollars from its reserves and adjusts interest rates to stabilize the Rupee.

2. Boosting Foreign Investments

Encouraging FDI (Foreign Direct Investment) and portfolio investments can increase foreign capital inflows, strengthening the Rupee.

3. Reducing Trade Deficit

India needs to increase exports and reduce dependency on imports, especially crude oil and electronic goods. Developing domestic industries can help achieve this.

4. Strengthening Economic Policies

Structural reforms to improve manufacturing, infrastructure, and ease of doing business can make India more attractive for investors, helping the Rupee gain stability.

---

Current Exchange Rates (as of February 28, 2025)

As of February 28, 2025, the US Dollar to INR exchange rate was 87.47. Other major currencies also saw changes against the Rupee, with the Euro at 97.50, the British Pound at 112.30, and the Japanese Yen at 0.76 per Rupee.

Exchange rates fluctuate daily based on global market conditions.

---

Frequently Asked Questions (FAQs)

Why is the Indian Rupee falling continuously?
The Rupee is weakening due to high trade deficit, foreign capital outflows, rising US interest rates, and global economic uncertainties.

How does a weak Rupee impact common people?
A weaker Rupee increases prices of imported goods, fuel, and daily essentials, leading to higher inflation.

Can the Rupee recover in the future?
Yes, with strong economic policies, increased exports, and reduced dependence on imports, the Rupee can regain stability.

What can the RBI do to control Rupee depreciation?
The RBI can intervene in the forex market, adjust interest rates, and implement monetary policies to stabilize the Rupee.

---

Conclusion

The Indian Rupee is facing continuous depreciation due to a combination of global and domestic factors. While this has both positive and negative effects, it is crucial for policymakers to take necessary steps to control inflation, boost exports, and strengthen India’s economic foundation to stabilize the Rupee.