DAW 4th December 2025, Mains Answer Writting 2026

DAW 4th December 2025, Mains Answer Writting 2026

Question

 “India’s macro fundamentals appear strong, yet the rupee continues to weaken.” Analyse the reasons behind this disconnect. (250 Words, 15 Marks). 

Model Answer

Approach:

 Introduction:  

  • Present the rupee’s fall to ₹90/$ as a psychological breach driven by global pressures and policy uncertainty, despite strong domestic fundamentals. 

Body: 

  • Explain the disconnect by analysing capital outflows, widening trade deficit, gold import surge, tariff shocks, delayed trade deal, global dollar strength, RBI’s soft intervention, and market behaviour, followed by short- and long-term corrective measures. 

Conclusion: 

  • Summarise that the rupee’s weakness stems from external imbalances overshadowing domestic strength, and stress the need for export competitiveness, capital stability, prudent policy, and RBI credibility for long-term currency resilience. 

 Introduction: 

  • India’s rupee has recently breached the psychologically crucial ₹90-per-dollar level, slipping over 5% this year and unsettling financial markets. This depreciation reflects a cumulative build-up of domestic and global pressures, including a strengthening US dollar and delays in the first tranche of the India–US trade agreement, which together have deepened concerns over India’s external-sector resilience. 

 Body: Strong Domestic Fundamentals Haven’t Stopped the Slide: 

  • India’s macro indicators appear supportive: 

  • Crude oil prices have eased 

  • Inflation has dropped below 1% 

  • GDP growth hit 8.2% in Q2 

Yet the rupee continues to face sustained downward pressure, revealing a disconnect between strong domestic fundamentals and the currency trend.  Reasons Behind This Disconnect: 

  • Persistent FPI Outflows Creating Capital Account Stress: 

  • Foreign portfolio investors have withdrawn ₹1.48 lakh crore in 2025, driven by- 

  • profit-booking amid weak equity performance, 

  • reallocation to higher-yield markets, and 

  • treating India as a liquidity source. 

  • These outflows tighten dollar liquidity, increase USD demand, and exert downward pressure on the rupee despite strong domestic fundamentals. 

  • Widening Trade Deficit Amid a Sharp Export Slowdown: 

  • India’s external sector has shown renewed stress- 

  • Exports fell 11.8% (Oct 2025) – an 11-month low 

  • Imports surged 16.6% to $76.1 billion – a record high 

  • Soft global demand, tariff disadvantages, and weakening competitiveness have widened the merchandise trade gap, intensifying depreciation pressure on the rupee. 

  • Extraordinary Surge in Gold Imports: 

  • Gold imports tripled to $14.7 billion due to festive demand and elevated prices. This has- 

  • sharply increased dollar outflows, 

  • worsened the current account,  

  • encouraged speculative buying. 

  • Gold has emerged as a significant short-term structural shock to rupee stability. 

  • Delays in the India–US Trade Agreement Fuelling Uncertainty: 

  • The prolonged delay in the first tranche of the trade deal has generated- 

  • uncertainty over future tariff structures, 

  • concerns regarding export competitiveness, and 

  • negative sentiment surrounding the balance of payments. 

  • Markets have begun to price in this uncertainty, weakening the rupee even without a formal policy change. 

  • U.S. Tariffs and Global Dollar Strength: 

  • A 50% U.S. tariff on Indian goods has reduced export margins. Simultaneously- 

  • the US dollar strengthened 3.6% in just two months, and 

  • the INR(Indian Rupee) underperformed peers like the IDR(Indonesian Rupiah) and PHP(Philippine Peso). 

  • Stronger global monetary conditions have amplified currency-specific stress on the rupee. 

  • RBI’s Calibrated, Soft-Touch Intervention: 

  • The RBI has adopted a measured Foreign Exchange (FX) Intervention Strategy- 

  • intervening only to smooth volatility, 

  • conserving reserves amid a drawn-down forward book, and 

  • allowing a market-determined adjustment. 

  • This has created a perception of policy tolerance for depreciation, which influences market behaviour. 

  • Market Behaviour Exacerbating Depreciation: 

  • Behavioural dynamics have deepened the slide- 

  • importers are front-loading USD purchases, 

  • exporters are delaying dollar conversion, and 

  • negative expectations shaped by IMF remarks and RBI silence. 

  • These create a self-reinforcing depreciation cycle, independent of macro fundamentals. 

  • Compounding Effect of Trade Shocks and Capital Outflows: 

  • The rupee’s sustained weakness reflects a multi-layered shock involving- 

  • tariff hikes, 

  • record gold imports, 

  • weak exports, 

  • persistent foreign outflows, and 

  • global dollar strength. 

  • Together, these forces overpower India’s otherwise strong macro fundamentals, resulting in the disconnect between economic strength and currency weakness. 

 Measures and Way Forward for Strengthening Rupee value: 

  • Short-term measures: 

  • RBI's market operations to sell dollars, Currency swap agreements with other countries, Monetary Policy Adjustments to attract foreign investment, import rationalization to restrict non-essential imports, etc. 

  • Long-term measures 

  • Diversifying trade payments: Boosting forex reserves and diversifying trade payments (e.g., using INR for international trade) to strengthen the rupee. (Economic Survey 2022-23) 

  • Export promotion: It can result in reduction of the current account deficit to improve rupee stability. (Rangarajan Committee on Balance of Payments, 1993) 

  • Strengthening of the Free Trade Agreements, improving ease of doing business to attract global companies, etc., can help enhance India's exports. 

  • Reduce Gold Import Pressure- strengthen gold monetisation, promote digital/recycled gold. 

  • Stabilise Capital Flows - deepen bond markets, attract long-term FDI, ensure policy certainty. 

  • Others: Fiscal Prudence, inflation control, reducing energy import dependence, etc. 

 Conclusion: 

  • The rupee’s slide to ₹90 per dollar reflects not weak domestic fundamentals but the dominance of external shocks, capital outflows, and market sentiment over macro stability. Strengthening external competitiveness, stabilising capital flows, managing import pressures, and reinforcing RBI’s policy credibility will be crucial to restore confidence and ensure long-term currency resilience.