Why The Decline Isn’t A Crisis & What It Means For India

The Indian rupee has been under scrutiny due to its recent depreciation against the US dollar. However, Union Finance Minister Nirmala Sitharaman has rejected concerns about weakening the rupee. She was quoted recently by PTI as stating that the rupee remains stable against most global currencies, and its fall against the dollar is more of an external economic affair than a weak macroeconomic base. This article highlights how this decline happened, what it does to the Indian economy, and what the government does about it.

Understanding the Recent Depreciation of the Rupee

Indian rupees have depreciated against the US dollar by 3% over the past few months. However, such declines certainly cause concern regarding inflation and the price of imports; they also warrant a much bigger perspective from an economic standpoint. Sitharaman explained that this is where the rupee performed far better than any other Asian currency other than the US dollar.

Key Reasons Behind the Rupee’s Decline Against the Dollar

1. Strengthening the US Dollar: The US Federal Reserve’s policies, particularly hints of fewer interest rate cuts in 2025, have contributed to a stronger dollar. Investors are opting for US treasury bonds, leading to increased demand for the dollar and making all other currencies, including the rupee, weak in comparison.
2. Widening Trade Deficit: India is witnessing a widening trade deficit as it records imported goods that far outweigh exports. An expanding trade deficit creates an appetite for more foreign currency, putting pressure on the rupee.
3. Foreign Institutional Investors (FIIs) Outflows: Emerging markets like India have experienced capital outflows due to global economic instability. FIIs withdrawing their investments results in a demand for dollars, weakening the rupee.
4. Geopolitical Tensions: The political crisis in Europe and the Middle East has not ended, hence keeping the world economy volatile, and investors have been rushing to have assets, such as the US dollar.
5. RBI’s Foreign Exchange Reserves Utilization: The Reserve Bank of India reportedly spent around USD 77 billion from its forex reserves to stabilize the rupee. The foreign exchange reserves in India had dropped from USD 701.176 billion in October 2024 to USD 629.557 billion in January 2025. The RBI’s intervention could be a part of controlling extreme volatility but does reflect challenges for currency stability.

The Indian rupee has been under scrutiny due to its recent depreciation against the US dollar.

Government’s Stance on the Rupee’s Performance

Sitharaman rejected the notion that the rupee is in freefall, stating that one needs to view the currency’s performance in relation to the global trend.

Key Takeaways from Sitharaman’s Remarks:

• Macroeconomic Fundamentals Are Strong: Its high GDP growth, solid foreign exchange reserves, and steady economic reforms strengthen the fundamentals of India’s economy.
• Rupee’s Stability Against Other Currencies: Compared to most Asian and global currencies, which have significantly depreciated, the rupee has emerged as a survivor.
• Criticism Based on Surface-Level Analysis: Sitharaman said critics must study the rupee fluctuations to understand the global market dynamics better rather than make sweeping statements about the weakening of the rupee.

Impact of Rupee Depreciation on the Economy

Although the rupee’s depreciation has been criticized, its impact on different sectors of the economy must be studied.

Positive Effects:

1. Boost for Exports: Indian goods and services are more competitive in international markets when the rupee is low, particularly in export-intensive industries like IT, pharmaceuticals, and textiles.
2. Increased Foreign Investments:  A low rupee will attract foreign direct investment as cross-border investors search for cheap ventures in India.

Compared to most Asian and global currencies, which have significantly depreciated, the rupee has emerged as a survivor.

Negative Effects:

1. Rising Import Costs: Import Costs Increase Since the rupee is weaker than before, the costs of imports may increase for certain essential commodities such as crude oil, electronic goods, machinery, and machinery parts, impacting inflation.
2. Higher External Debt Servicing: India’s external borrowings become costlier as repayment amounts increase with a depreciating rupee.
3. Impact on Consumer Purchasing Power: Higher import costs translate to increased prices for everyday goods, impacting the purchasing power of consumers.

What Measures Is the Indian Government Taking?

The Indian government and RBI are engaged in various efforts to stabilize the currency through various strategies as follows:

1. Forex Market Intervention: The RBI has been intervening to curb excessive volatility in the FX market using its foreign currency reserves.
2. Monetary Policy Adjustments: The central bank manages to ensure inflation, and with that, interest rates make sure it becomes good at economic stability.
3. Encouraging Local Manufacturing: Promoting ‘Make in India’ will eventually help reduce imports, hence helping the rupee strengthen in the long run.
4. Trade Diversification:  The proposed steps are integrating trade relationships with other countries and exporting these products to achieve a trade balance.

Comparing the Rupee’s Performance with Other Currencies

Despite concerns, the rupee has fared better than other emerging market currencies. For example:

• The Chinese Yuan and Japanese Yen also saw a significant decrease in value relative to the US dollar.
• The Indian rupee performs somewhat better than the Indonesian rupiah or South Korean Won.
• This, in turn, has also reflected volatility in the Euro and British Pound due to global economic uncertainty.

The growth of international financial markets will significantly aid India’s ability to withstand currency volatility.

Expert Opinions on the Rupee’s Outlook

According to financial analysts, short-term rupee volatility is inevitable; however, in the long run, the future of India’s economy remains optimistic.

• Economists at Morgan Stanley predict that India’s GDP growth will sustain a strong trajectory, supporting rupee stability.
• RBI Governor Shaktikanta Das has assured us that the central bank will take the necessary steps to curb extreme currency fluctuations.
• International Monetary Fund (IMF) reports, emerging markets including India will continue to be on the growth trajectory notwithstanding currency fluctuations driven by strong consumption and policy reforms.

Conclusion

External developments in global economic trends, rather than internal weaknesses, force the Indian rupee to fall in value against the US dollar. Finance Minister Nirmala Sitharaman reiterated that this government remains steadfast towards their economy. The minister emphasized that the fundamentals remain sound even as short-term volatility tests India’s macroeconomy. Interventions shall be made available for long-term strategies and policies on economic stability. At this stage, the rupee must be strengthened by maintaining economic expansion, which must be supported by more excellent export facilitation and less reliance on imports.

The growth of international financial markets will significantly aid India’s ability to withstand currency volatility. Analysts and policymakers must have a balanced perspective on the challenges and opportunities of currency movements.

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