Syllabus: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Recent Rupee Trends
- The rupee has weakened nearly 7% since late November 2024, falling from ₹83.4 to about ₹89.2 per dollar.
- This mirrors the 2018 depreciation episode, when the rupee dropped 11%–12% amid global monetary tightening and trade frictions.
Global Backdrop
- Strong U.S. dollar, higher U.S. interest rates and renewed trade tensions are exerting pressure on emerging market currencies.
- As in 2018–19, the RBI has relied on currency-swap operations to inject rupee liquidity and stabilise markets.
- In February 2025, the RBI conducted a $10 billion buy-sell swap auction to infuse long-term rupee liquidity.
Drivers of Current Pressures
- Persistent external stress caused by a widening current account deficit.
- Increased bullion imports as a hedge during global uncertainty have worsened the CAD.
- Exporters are struggling with elevated U.S. tariffs, affecting competitiveness.
- Under the managed-float regime, the RBI can only smooth volatility, not defend a fixed exchange rate.
RBI’s Stabilisation Efforts
- Between November and now, the RBI has sold around $50 billion in forex to cushion the rupee.
- Despite intervention, depreciation continues, signalling strong external headwinds.
Macroeconomic Cushion
- India holds ~$693 billion in forex reserves, offering some comfort.
- Inflation dropped sharply: headline CPI was 0.25% in October 2025, well below the 2%–6% tolerance band.
- This allows the RBI to absorb mild depreciation without resorting to steep rate hikes.
Oil Dependence & Inflation Risks
- India is shifting from cheaper Russian crude to costlier U.S. oil, raising import bills.
- Crude constitutes over 20% of India’s FY25 imports, making depreciation inflationary.
Policy Imperatives
- Monetary stabilisation alone is insufficient; structural measures are essential.
- India must reduce oil dependence through accelerated transport electrification.
- A coherent trade strategy is needed, rather than scattered bilateral deals that have worsened trade balances with Japan, UAE, and ASEAN.
