The Indian rupee has recently depreciated to ₹90.43 per USD, making it the worst-performing Asian currency in 2025. The current depreciation stands out because it occurs despite India’s robust GDP growth of 8%, signalling deeper vulnerabilities in the external sector, specifically the capital account.
Factors Driving the Recent Rupee Depreciation:
- Weak Capital Inflows: The Core Driver:
- Net capital inflows collapsed from $107.9 bn (2007–08) to just $18 bn (2024–25) and $8.6 bn (Apr–Sep 2025) which is lower than the CAD itself.
- FDI inflows plunged to $959 million in 2024–25, recovering only mildly to $7.7 bn in Apr–Sep 2025.
- FPI outflows persisted: –$18.5 bn (2021–22), –$5.1 bn (2022–23), –$14.6 bn (2024–25) leading to less dollar availability.
- Widening Merchandise Trade Deficit:
- Exports fell –11.8% in Oct 2025 even as imports surged +16.6%.
- Gold imports also grew by 200% in October 2025.
- Brent crude prices elevated leading to higher oil import bill.
- Uncertainty Over India–US Trade Deal: Delay in finalising tariff commitments has reduced investor confidence, increased hedging against India exposure and triggered speculative pressures in FOREX markets.
- Global Risk-Off Sentiment: US Fed tightening and geopolitical tensions across the Middle East, Red Sea, and East Asia boosted the dollar’s safe-haven status.
- Structural Inflation Differential: Persistent higher inflation in India vs trading partners erodes INR purchasing power, causing long-term depreciation pressure.
Implications of Rupee Depreciation for the Indian Economy:
- Imported Inflation Worsens: Costlier imports of oil, fertilisers, machinery, electronics increases cost-push inflation which reduces household purchasing power.
- External Sector Pressure: Costlier imports worsen trade deficit. Higher outflow for foreign-currency denominated payments may further erode CAD.
- Higher Debt Servicing Burden: Indian companies with foreign loans face higher rupee payments, impacting profitability. Government’s external debt servicing burden also rises.
- Potential Capital Flight: Further depreciation erodes foreign investor confidence increasing financial market volatility.
- Positive Impacts:
- Boost to exports across sector such as IT, textiles, pharma although global demand is weak.
- Higher rupee value of inward remittances from Indian diaspora.
Measures to Ensure Long-Term Currency Stability:
- Strengthen Capital Account Stability through simplifying FPI norms and deepening corporate bond markets to attract long-term capital.
- Promote Global Internationalisation of INR by expanding Rupee-based trade settlement via Special Vostro Rupee Accounts (SVRAs).
- Promote barter-currency swap lines with key partners such as Japan, UAE, and Singapore.
- Implement structural export reforms as recommended by Rangarajan Committee and reduce gold imports through monetisation schemes.
Conclusion:
Long-term rupee stability requires deep structural reforms to boost export competitiveness, reduce import dependence, internationalise the rupee, and strengthen capital flows. A stable rupee is indispensable for India’s aspiration of becoming a $5-trillion, resilient, globally integrated economy.
‘+1’ Value Addition:
- India recorded current account surplus only 4 times in 25+ years (2001–02, 2002–03, 2003–04, 2020–21).
- Merchandise trade deficit may cross $300 bn in 2025–26, the highest ever.
- Invisibles surplus surged to $263.9 bn in 2024–25, shielding India from a blowout CAD.
- India today is the “Office of the World”, driven by service exports such as IT, KPO, consulting, design.
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