Analysts attribute the weakness in the rupee and domestic equities to persistent foreign investment outflows from equity markets, a widening current account deficit, and limited RBI intervention
Just days after India cheered for the robust economic growth recorded in the July-September quarter, the Indian rupee plunged to a historic low of over 90 per US dollar, giving a reality check to policymakers.
The Indian currency slipped to an all-time low of Rs 90.28 per dollar on December 3, registering a 5.3 per cent year-to-date (YTD) drop. This is the sharpest annual decline since 2022, making the Indian rupee the worst-performing currency in Asia so far this year. Analysts attribute the weakness in the rupee and domestic equities to persistent foreign investment outflows from equity markets, a widening current account deficit, and limited RBI intervention.
Apart from domestic factors, the rupee is being impacted by global economic uncertainty. Over the last few months, big investors have been reallocating their portfolios — offloading their investments in developing economies and parking their money in global leaders. In India alone, foreign portfolio investors (FPIs) have sold around $18 billion worth of Indian securities, exerting pressure on the rupee.
The unprecedented 50 per cent tariff imposed on India by US President Donald Trump did no less harm. Despite the punitive tariffs, the Indian economy performed well in the second quarter, powered by domestic demand. However, exports registered a marginal dip in the July-September quarter even though American importers front-loaded their purchases from India to escape the higher tariffs.
Another major cause for the rupee weakening is the limited intervention by the Reserve Bank of India (RBI). Unlike in the past, the Central bank appears to have taken a conscious decision to stop defending the rupee at a particular exchange rate. Although this strategy may force some short-term foreign investors to leave India in anticipation of a fall in rupee value, the Central bank can avoid burning foreign exchange reserves in a futile attempt to maintain an artificially strong rupee.
While the depreciation of the rupee will make imported goods, foreign education and foreign travel costlier, it will make Indian exports more attractive in the global market. A weaker rupee will also partially offset the impact of US tariffs on Indian goods. A revival in export-focused industries will help India generate more jobs for its growing young population, which will be positive for the economy.
If global uncertainty eases and India seals trade deals with the US and other countries — Indian exporters — backed by a cheaper rupee — will be in a much better position to reap the benefits.
On the flip side, it will make gold, silver, crude oil, fertilisers and electronic items costlier. However, the price rise in imported goods could nudge policymakers to promote domestic production, which will benefit the economy in the long run.
While exchange rates do not always reflect domestic economic strength, the rupee’s fall should still be a concern for the country. It must serve as a reminder for policymakers to increase self-reliance in several import-dependent sectors and accelerate the electrification of India’s transport system to reduce dependence on imported fossil fuels.
