By Nalinikanta Dhar
The Indian rupee slipped to a historic low against the US dollar on December 4, 2025, breaching the psychologically significant level of `90 per dollar. The speed of this depreciation has sparked intense concern and debate among policymakers, businesses, and investors. While currency movements are normal in an open economy, the rapid decline of the rupee calls for a closer examination of its causes, implications, and the policy response required to manage potential risks.
In principle, exchange rates are influenced by inflation differentials between countries. However, in reality, many factors affect currency values. In India’s case, apart from inflation, key determinants include the current account balance, global crude oil prices, the strength of the US dollar, domestic economic conditions, geopolitical developments, and the monetary policy stance of the Reserve Bank of India (RBI). Since nearly 60 per cent of global trade is invoiced in US dollars, the focus naturally remains on the rupee-dollar exchange rate.
Historically, the rupee’s depreciation has been gradual and consistent. At the time of India’s independence, one dollar traded at Rs 3.30. This moved to Rs 4.76 in 1960, Rs 7.89 in 1980, Rs 17.50 in 1990, and around `45 in 2000. After the adoption of economic liberalisation in 1991, the rupee depreciated at an average annual rate of roughly 3 per cent. However, the nearly 6 per cent depreciation witnessed in 2025 alone is significantly higher than long-term trends, raising legitimate concerns.
A weaker rupee produces mixed economic outcomes. On the negative side, India relies heavily on imports, particularly crude oil, nearly 70 per cent of which is sourced from abroad. Depreciation raises import costs for fuel, electronics, machinery, pharmaceuticals, and chemicals. Higher costs filter into transportation and manufacturing, increasing inflationary pressures. A weaker currency also raises the burden of servicing external debt and increases government expenditure on interest payments. Indian students studying overseas and citizens travelling abroad also face higher financial strain.
The financial markets often react cautiously to currency weakness. Foreign portfolio investors may reduce their exposure, leading to increased volatility in equity markets. If the RBI raises interest rates to protect the currency or curb inflation, domestic demand and investment could slow, impacting overall economic growth.
However, currency depreciation also carries advantages. Indian exports become more competitive, supporting manufacturing and services exports. Remittances from non-resident Indians rise as each dollar earns more rupees, providing crucial support to the balance of payments. These benefits partially offset the adverse effects of a weaker currency.
Several factors explain the rupee’s recent decline. Elevated US interest rates, currently averaging around 4.5 per cent, have attracted global capital towards dollar-denominated assets. Post-pandemic liquidity tightening has intensified this trend. In 2025, foreign investors reportedly withdrew nearly `1.5 lakh crore from Indian markets. Additionally, higher tariffs imposed by the US on Indian exports have weakened export growth and intensified uncertainty over trade relationships.
Competing emerging economies such as South Korea, Taiwan, Japan, and Indonesia have delivered stronger capital market performance, diverting foreign funds away from India. Foreign direct investment inflows and external commercial borrowings have also moderated, adding pressure on the capital account.
Despite these challenges, India’s macroeconomic fundamentals remain relatively robust. Inflation is projected to stay low, foreign exchange reserves remain adequate, and fiscal indicators compare favourably with other large economies. Corporate earnings are healthy, structural reforms are progressing, and long-term growth prospects remain intact. The RBI’s decision to avoid aggressive currency intervention, while cutting interest rates to support growth, reflects confidence in economic resilience.
In conclusion, the rupee’s depreciation deserves close monitoring but not panic. With prudent policy management, export promotion, and continued structural reforms, India is well-positioned to manage currency volatility while sustaining long-term growth.
The writer is an expert in Economics.
Views are personal.
