Rupee Depreciation

Rupee Depreciation

  • Context: 

  • The Indian Rupee (INR) recently depreciated to a lifetime low of 89.6650 against the US Dollar. 

  • The fall was triggered by global risk-off sentiment, uncertainty surrounding the India-US trade deal, and significant foreign fund outflows. 

  • Concept: Currency Appreciation vs. Depreciation: 

  • Rupee depreciation means that the value of the Indian Rupee falls compared to foreign currencies such as the US Dollar. 

  • If earlier ₹60 = $1, and later ₹89 = $1, the rupee has depreciated. 

  • Higher rate of inflation leads to depreciation of a currency 

  • Exports become cheaper and Imports become costly. When Exports goods and services more than Imports goods and services (E>M), this may lead to Current Account Surplus. 

  • A currency appreciates when its value increases relative to another currency.  

  • If the exchange rate moves from ₹80 per USD → ₹78 per USD, it now takes fewer rupees to buy one dollar. 

  • lower domestic inflation compared to the foreign country 

  • Exporters are worse off as their products become more expensive in the global market, while importers benefit as foreign goods become cheaper. 

  • Factors Behind the Falling Rupee: 

  • Global Factors: 

  • US Fed Policies:  

  • The expectations of shallow rate cuts and high US bond yields have made the US more attractive to investors compared to emerging markets like India. 

  • Strong Dollar 

  • Geopolitical Tensions 

  • Domestic Factors: 

  • FII Outflows: There have been substantial Foreign Institutional Investor (FII) outflows (with over $4 billion withdrawn from Indian stocks in January 2025 alone) 

  • Trade Deal Uncertainty: The lack of visibility on tariff rollbacks or assurances regarding the India-US trade deal has weakened sentiment. 

  • Short Covering: Market participants covered short positions after the RBI allowed the rupee to trade beyond the 88.80 level. 

  • Impact on Indian Economy: 

  • It increases the cost of imported goods.  

  • Since fuel prices directly affect production costs as an intermediate input, a rise in fuel import costs is inflationary. 

  • It inflates the import bill, specifically for crude oil (India's dependency was 88.1% in 2024). 

  • It worsens the trade deficit (which touched an all-time high of $32.8 billion in November 2024)