🇺🇸💱 US Dollar vs INR: Why the Indian Rupee Is Depreciating in 2025

The Indian Rupee (INR) has slid significantly against the US Dollar (USD) in 2025, trading around ₹85–₹87 per USD through much of the first half. This depreciation affects everything from the cost of crude oil imports to the price of overseas education, and from corporate profit margins to holiday budgets. In this comprehensive analysis, we explore all the domestic and global forces driving the rupee’s decline, examine its multi-dimensional impact, review how the Reserve Bank of India (RBI) is responding, and outline strategies India can adopt to manage and potentially reverse this trend.

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1. Foundations: Exchange Rates and Currency Movements

Before diving into causes, it’s important to understand what exchange rate movements represent:

• Nominal Exchange Rate: The price of one currency in terms of another (e.g., ₹85 per USD).
• Real Effective Exchange Rate (REER): Adjusts the nominal rate for inflation differentials against a basket of trading-partner currencies.
• Appreciation vs Depreciation: When INR falls from ₹75 to ₹85 per USD, it has depreciated; conversely, if it moves from ₹85 to ₹80, it has appreciated.

Movements reflect shifts in demand and supply of currencies, driven by trade flows, capital flows, interest- rate differentials, and market sentiment.

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2. How Far Has the Rupee Fallen?

• January 1, 2025: ₹83.40 per USD
• March 31, 2025: ₹85.05 per USD
• June 1, 2025: ₹86.50 per USD

That’s roughly a 3.7% depreciation in six months—one of the fastest slides since 2020’s pandemic shock.

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3. Global Drivers of INR Depreciation

3.1 US Federal Reserve Rate Policy

• Fed Funds Rate: Hovering at a 16-year high of 5.25–5.50% in mid-2025 to tame US inflation around 3.5%.
• Impact: Higher US interest rates attract foreign capital into US Treasuries and money markets.
• Rupee Effect: Capital outflows from emerging markets, including India, increase selling pressure on INR.

3.2 Strength of the US Dollar Index (DXY)

• The DXY, which tracks USD against six major currencies, rose over 4% between January and June 2025.
• A stronger dollar makes all other currencies appear weaker by comparison, including the rupee.

3.3 Crude Oil Prices and India’s Import Bill

• Q1 2025 Average Brent: ~$85/barrel (vs. $72/barrel in Q1 2024).
• India’s Oil Import Dependency: ~85% of consumption.
• Annual Impact: Every $1 rise in oil price adds ~₹18,000 crore to the annual oil import bill, increasing USD demand and straining the INR.

3.4 Geopolitical Tensions & Safe-Haven Flows

• Russia-Ukraine Conflict: Continued supply disruptions and sanctions push commodity prices up.
• Middle East Unrest: Periodic flare-ups drive investors toward “safe-haven” USD.
• China-US Tech Rivalry: Supply-chain shifts cause intermittent risk-off episodes, hurting Asian currencies.

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4. Domestic Factors Weakening the Rupee

4.1 Widening Current Account Deficit (CAD)

• FY 2023-24 CAD: 2.1% of GDP.
• FY 2024-25 (Est.) CAD: 2.6% of GDP, owing to higher oil, fertilizer, and electronics imports, with exports growing at a modest 4% YoY.
• Mechanism: More dollars flow out for imports than flow in from exports, creating net demand for USD.

4.2 Foreign Portfolio Outflows

• Equities: FPI net outflow of $6.5 bn in Q2 2025.
• Bonds: FPI net outflow of $5.8 bn in Q2 2025.
• Reason: With risk-off sentiment and higher yields abroad, global funds rotated away from emerging markets.

4.3 Sluggish Export Performance

• Key Sectors: Textiles (+2% YoY), Gems & Jewellery (−1% YoY), Engineering goods (+5% YoY).
• Global demand is muted amid slowing developed-market growth, limiting forex earnings.

4.4 Domestic Inflationary Pressures

• Retail Inflation: Averaging 6.2% in H1 2025, above RBI’s 4% target.
• Cost-Push Factors: High commodity prices and logist­ic bottlenecks.
• Exchange Rate Pass-Through: Weaker INR raises import costs, fuelling further inflation—a vicious cycle.

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5. How the RBI Is Responding

5.1 Forex‐Market Intervention

• USD Sales: RBI sold about $10 bn from reserves in Q2 2025 to defend the rupee.
• Sterilization: To neutralize liquidity effects, RBI conducted sell-buy swaps and short-term reverse repos.

5.2 Monetary Policy Adjustments

• Policy Repo Rate: Hiked from 6.50% to 6.75% in April 2025.
• Objective: Attract yield-seeking capital inflows and curb inflation.

5.3 Macroprudential Measures

• Tightening LTV Norms: For gold and real-estate loans, reducing excessive import-linked demand.
• Encouraging Exports: Faster refunds of Duty Credit Scrips to improve exporters’ working capital.

5.4 Swap Lines and Contingent Arrangements

• Maintains bilateral swap lines with the US Fed ($60 bn) and Japan ($75 bn) as backstop liquidity.

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6. Multi-Dimensional Impact of Rupee Depreciation

6.1 On Consumers and Households

• Fuel Prices: A ₹5 depreciation adds ~₹3–₹4/litre at the pump.
• Imported Goods: Smartphones, electronics, and luxury imports become costlier by 5–8%.
• Education & Travel: Overseas tuition and holiday packages surge by 6–10%.

6.2 On Businesses and Industries

• Import‐Dependent Sectors: Airlines, petrochemicals, and telecom gear manufacturers see margin squeeze.
• Export-Oriented Units: Textiles, IT services, and pharmaceuticals benefit from improved price competitiveness abroad.

6.3 On Financial Markets

• Bond Yields: Rise as RBI tightens to attract capital—10-year yield moved from 7.1% in January to 7.4% in May 2025.
• Equity Volatility: Nifty 50 VIX spiked to 23 in March 2025 (vs. 16 average in 2024).

6.4 On Government Finances

• Subsidy Burden: Increased fertilizer and fuel subsidies to cushion consumers add ₹50,000 crore to fiscal cost.
• Debt Servicing: External debt interest payments rise in INR terms, widening fiscal deficit.

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7. In-Depth Case Studies

7.1 Auto Component Manufacturer

Company A imports specialized auto parts for EV batteries worth $2 million per quarter.

• At ₹82/USD: Cost = ₹16.4 crore
• At ₹86/USD: Cost = ₹17.2 crore
• Margin Impact: 4.9% drop in gross margin, forcing price hikes or margin sacrifice.

7.2 IT Services Exporter

Company B earns $500 million annually.

• At ₹82/USD: Revenue = ₹41,000 crore
• At ₹86/USD: Revenue = ₹43,000 crore
• Benefit: ₹2,000 crore incremental revenue, boosting net profit if hedging is minimal.

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8. Comparisons: How Other EM Currencies Are Faring

Currency	Jan 1 ’25 vs Jun 1 ’25 Change	Notes
Turkish Lira (TRY)	–15%	Structural deficits, political risk
Brazilian Real (BRL)	–7%	Commodity slowdown, political turmoil
South African Rand (ZAR)	–6.5%	Energy crisis, policy uncertainty
Indonesian Rupiah (IDR)	–3%	Strong commodity exports, fiscal buffers
Indian Rupee (INR)	–3.7%	Moderate – thanks to RBI intervention

Compared with peers, INR depreciation has been moderate, reflecting RBI’s active defense and India’s robust reserves.

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9. Pathways to Stabilization

9.1 Boosting Foreign Inflows

• FDI Reforms: Greater opening in defense, insurance, and data centers.
• Green Bonds: Position India as a sustainable-finance hub.
• Diaspora Bonds: Mobilize NRI savings at competitive rates.

9.2 Export Competitiveness

• Logistics Overhaul: Faster cargo clearances, improved port infrastructure.
• Technology Upgradation: Subsidies for automation in SMEs.
• Trade Agreements: Push for RCEP accession or bilateral pacts.

9.3 Reducing Import Dependence

• Renewable Energy: Scale up solar, wind, and green hydrogen to cut oil import bill.
• Domestic Capital Goods: Incentivize local manufacture of telecom, auto components.

9.4 Macroeconomic Stability

• Inflation Targeting: RBI to communicate forward guidance clearly.
• Fiscal Consolidation: Narrow the fiscal deficit through rationalized subsidies and higher disinvestment proceeds.

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10. Near-Term Outlook and Forecasts

• Q3 2025: Trading range likely ₹85–₹88/USD, contingent on Fed stance and monsoon trajectory.
• FY 2025-26 CAD projected at ~2.3% of GDP (improvement if exports revive).
• Forex Reserves: Expected to stay above $600 bn, providing a buffer for interventions.

Analysts at leading banks forecast a gradual appreciation to ₹83–₹84 by Q2 2026, provided global rates stabilize and India’s growth momentum returns.

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11. FAQs

1. Is a weaker rupee always bad?
   Not necessarily—exports and remittances gain, but imports and inflation suffer.

2. Can RBI fully defend the rupee?
   RBI can smoothen volatility but cannot permanently fix it without fundamentals support.

3. How to hedge currency risk?
   Corporates use forwards, options, and currency swaps to lock in rates.

4. Will the rupee hit ₹90/USD?
   Possible if crude soars above $100 or Fed hikes rates further—yet unlikely without extreme stress.

5. How does rupee depreciation affect my savings?
   Reduced purchasing power for imported goods; consider overseas exposure via mutual funds or NPS.

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🔗 Official Reference

For daily USD-INR rates and RBI’s circulars:
👉 Reserve Bank of India

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Conclusion
The rupee’s depreciation in 2025 is driven by a complex interplay of global tightening, high commodity prices, capital flows, and domestic imbalances. While challenging, it also offers export and remittance gains. India’s success in navigating this environment hinges on bold structural reforms, robust export promotion, and calibrated monetary–fiscal coordination.

Feel free to share your thoughts or questions in the comments below!