Despite strong domestic macroeconomic indicators (8.2% GDP growth, near 1% inflation, lower crude prices, etc.), INR depreciated by more than 5% in 2025.
- Depreciation of the rupee occurs when its value declines relative to foreign currencies in the open market.
Primary Factors Driving Depreciation
- Uncertainty over US-India Trade Deal: the imposition of steep US tariffs (up to 50%) on Indian goods challenges export competitiveness and dents investor confidence.
- Capital Outflows: Foreign Portfolio Investors (FPIs) have pulled significant funds, often treating India as a liquidity source to pursue opportunities elsewhere.
- Widening Trade Deficit: driven by high demand for gold, electronics, and machinery, while exports to major markets, including the US, have softened.
- Speculative Investment: continuous dollar demand from importers who are front-loading their dollar purchases on expectations of further rupee weakening.
Key Impacts on Indian Economy
- Negative Impact:
- Imported Inflation: as India imports a large proportion of its crude oil (90%), edible oils, etc.
- Increased Subsidy Burden: Higher import prices for fertilizers will swell the government's subsidy bill.
- Higher Cost of Overseas Liabilities: Companies with dollar-denominated debt face higher repayment and interest servicing costs.
- Positive Impact:
- Export Competitiveness: makes Indian exports cheaper and more competitive in the global market.
- Remittances: A weaker rupee could make remittances from overseas more attractive.
What measures can be taken to restore the value of INR?
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