The Weakening of the Rupee: Causes, Impacts and Policy Perspectives

Why in the News?

1. The Indian Rupee (INR) hit a record low of ₹88.6 against the US dollar on September 23, 2025.
2. The decline is notable because the US dollar itself has weakened against most major currencies, yet the rupee continues to lose ground.
3. This raises questions about India’s trade competitiveness, investment climate, and monetary policy response.

Key Highlights

1. Recent Trends in Rupee Value
   1. Against the Dollar: Since January 2025, INR has lost over 3% of its value; 3% fell in just one month (August–September 2025).
   2. Against Other Currencies: Rupee is also weaker against the euro and pound, reflecting a broad-based depreciation.
   3. Comparisons: While currencies of major economies like the Euro, Yen, Yuan, Real, and Rand have appreciated against the dollar, the INR has fallen, placing India in the company of weaker currencies like Bangladesh and Pakistan.
2. Why the Rupee is Sliding
   1. Exchange Rate Basics: Value depends on relative demand for currencies. If global demand for rupees rises (via exports, FDI, FPI), the rupee strengthens; otherwise, it weakens.
   2. Weak Exports: India’s export growth is stagnant, worsened by US tariffs and shrinking global demand.
   3. Falling Investments:
      1. Foreign Portfolio Investment (FPI) outflows due to weak corporate earnings.
      2. Foreign Direct Investment (FDI) inflows are slowing as investors doubt India’s medium-term GDP growth.
   4. Global Factors:
      1. US interest rate policies keep capital flows tilted towards the dollar.
      2. Trump-era protectionism has hurt Indian competitiveness.
   5. Impact of a Weaker Rupee
      1. Negative Impacts
         1. Higher Import Costs: Crude oil, electronics, and machinery imports become expensive, fueling inflation.
         2. Corporate Stress: Indian firms with foreign currency debt face rising repayment burdens.

• Consumer Burden: Prices of fuel, foreign education, travel, and imported goods rise.

1. Silver Lining
   1. Boost to Exports: Indian goods become cheaper for global buyers.
   2. Tourism: India becomes more affordable for foreign tourists.

• RBI’s Stance: The central bank is allowing a gradual depreciation to support exporters instead of intervening aggressively.

4. RBI and Government Response
   1. Past Approach: RBI used to defend the rupee with large-scale interventions in forex markets.
   2. Current Approach: Allowing the rupee to weaken moderately to keep exports competitive.
   3. Policy Tools:
      1. Can use forex reserves (~$600 bn) to stabilise sudden volatility.
      2. May adjust interest rates and capital flow regulations to attract investment.

• Government focus on Production Linked Incentive (PLI) schemes and ease of doing business to revive FDI.

5. Long-Term Concerns
   1. Persistent Current Account Deficit (CAD) due to heavy oil import dependence.
   2. Structural Weaknesses in manufacturing exports — India still struggles to move up the global value chain.
   3. Falling Investor Confidence linked to doubts over India’s GDP growth trajectory and corporate earnings.
   4. Risk of Imported Inflation eroding household purchasing power.

Implications

1. For Economy
   1. Rising import costs can widen CAD.
   2. Pressure on fiscal deficit if subsidies (fuel, food) are increased to cushion inflation.
2. For Trade
   1. A weaker rupee improves price competitiveness but only if export markets are open.
   2. Protectionism (like Trump’s tariffs) can neutralise benefits.
3. For Monetary Policy
   1. RBI faces a dilemma: allow depreciation to aid exports or intervene to prevent runaway inflation.
   2. Excessive intervention may deplete forex reserves.
4. For Investments
   1. Sustained rupee weakness discourages FPI inflows (capital flight risk).
   2. FDI needs structural reforms, not just exchange rate changes.
5. For Geopolitics
   1. Shows India’s vulnerability to global shocks and protectionism.
   2. Highlights need for diversification of trade partners and greater self-reliance in critical imports (energy, electronics).

Challenges and Way Forward

Conclusion

The rupee’s weakness in 2025 reflects structural vulnerabilities in India’s economy rather than just global dollar trends. While a depreciating currency can temporarily aid exports, without strong fundamentals in trade, investment, and manufacturing competitiveness, it risks triggering inflation and capital flight. India needs a balanced policy mix, short-term stabilisation by RBI and long-term structural reforms by the government, to ensure the rupee regains strength and stability.