Syllabus: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Context
- On December 3, the rupee crossed ₹90 per dollar, a psychologically important threshold.
- The depreciation reflects both market pressures and a deliberate RBI shift toward reduced intervention under a managed-float regime.
Key Drivers of Rupee Depreciation
- Declining Export Earnings
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- The U.S. imposed a 50% tariff on Indian goods, sharply reducing export competitiveness.
- Exports to the U.S. fell by 12% in September and 9% in October 2025.
- Overall exports for October 2025 dropped nearly 12% year-on-year.
- Despite this, April–October exports rose marginally (0.5%), indicating compensatory growth in other markets.
- Manufacturing PMI hit a nine-month low, signalling future export stress.
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- Surging Gold and Silver Imports
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- Gold imports jumped ~200% year-on-year in October to $14.7 billion.
- Silver imports rose 528% to $2.7 billion.
- Imports spiked due to safe-haven demand, reflecting investor anxiety and stock-market volatility.
- This created a substantial dollar outflow, deepening the rupee’s weakness.
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- Heavy FPI Outflows
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- FPIs withdrew $17 billion from equity markets in 2025 — the highest in two decades.
- Outflows increased demand for dollars as investors repatriated funds, accelerating depreciation.
RBI’s Changed Strategy
- Reduced Currency Defence
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- Earlier episodes saw aggressive interventions:
- $30 billion sold in Q2 2022;
- $38 billion sold in Q4 2024.
- In Q3 2025, RBI sold only $10.9 billion, indicating a shift from defending a level to allowing gradual depreciation.
- Earlier episodes saw aggressive interventions:
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- Rationale Behind Allowing the Slide
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- A weaker rupee may offset tariff impacts by making exports relatively cheaper.
- RBI aims for controlled, gradual depreciation to help markets adjust without instability.
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- Economists disagree on effectiveness:
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- Some see it as a necessary macro-adjustment.
- Others warn nominal depreciation may not reduce real exchange rate due to domestic price pressures and weak U.S. demand.
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Conclusion
- The rupee’s fall past ₹90 is driven by export contraction, import surges, and capital outflows, but the decisive factor is the RBI’s shift to limited intervention. The central bank is using depreciation as a shock absorber, though its success depends on inflation trends, global demand, and India’s broader structural challenges.