Overview of the Rupee Depreciation
The sudden decline in the value of the Indian rupee has caused concern among the public and market players, despite India's stable economic indicators such as a high growth rate, low inflation, and a modest current account deficit.
Current Economic Indicators
- India's growth rate for the current year is projected at 7.4%.
- Consumer Price Index (CPI) inflation concluded 2025 at 1.33%, below the Reserve Bank of India (RBI)'s target for the fourth successive month.
- The current account deficit stood at 0.76% of GDP for the first half of 2025-26, compared to 1.35% the previous year.
- The rupee depreciated by about 6% since April 2025.
Main Causes of Rupee Depreciation
- The trade deficit from April to December 2025 was $96.58 billion, a slight increase from $88.43 billion in the same period the previous year.
- Significant capital outflows are identified as the primary cause of the rupee's depreciation.
- U.S. tariffs on Indian exports have fuelled these capital outflows.
- Net capital inflows turned negative in 2025, with a net outflow of $3,900 million, compared to an inflow of $10,615 million in 2024.
International Relations and Economic Policy
India's diplomatic stalemate with the U.S. over tariffs has shifted the problem from economic factors to geopolitical concerns. Continued tariffs and threats of additional tariffs have exacerbated the situation.
Impact on Trade and Economy
- India's imports, predominantly essential goods, will become more expensive, potentially increasing inflation.
- Crude oil alone constitutes 25% of India's total merchandise imports.
- A fall in the rupee's value offers limited advantages to exports due to increased import content and existing high tariffs in the U.S.
RBI's Role in Exchange Rate Management
- The RBI's intervention in the foreign exchange market is aimed at reducing volatility rather than pegging the rupee's value.
- The RBI seeks to minimize shocks from rupee fluctuations without preventing its fall.
Conclusion and Recommendations
- The decline of the rupee is mainly due to non-economic pressures such as U.S. tariffs and capital outflows.
- India must reach an understanding with the U.S. to stabilize the rupee and mitigate capital outflows.
- Until then, the RBI can only strive to smoothen the rupee's depreciation.
