Context:
The Indian rupee has been experiencing sustained depreciation, falling nearly 7% since November 2024, sliding from approximately ₹83.4 to around ₹89. This decline mirrors earlier periods of sharp depreciation driven by global economic pressures, oil import dependency, and interest rate differentials.
Key Highlights
Drivers of Rupee Depreciation
- Strong U.S. dollar due to:
- Higher U.S. interest rates
- Global geopolitical uncertainties
- Shift in global capital flows toward dollar-denominated safe assets
- Rising global trade tensions and supply chain uncertainties.
- Persistent high crude oil import bill, worsening India’s current account deficit (CAD).
RBI Actions
- The Reserve Bank of India (RBI) has repeatedly intervened to manage volatility, not defend a fixed exchange rate.
- Key interventions included:
- Currency swaps
- Dollar sales
- Auctions to inject liquidity
- Between November and now, RBI is estimated to have deployed nearly $50 billion to cushion volatility.
- Despite depreciation, India retains comfortable forex reserves (~$630 billion).
Inflation and Monetary Policy Impact
- Retail inflation softened to 5.1%, and RBI’s repo rate remains unchanged at 6.5%.
- With external pressures persisting, the RBI avoided raising interest rates, given the high domestic borrowing cost and risk of slowing growth.
Relevant Prelims Points
- CAD (Current Account Deficit):
- Gap between exports and imports; high oil import dependency worsens CAD.
- Exchange Rate Regime:
- India follows a managed float system, not a fully fixed or free-floating mechanism.
- Forex Reserves Components:
- Foreign currency assets, gold, SDRs, and IMF reserve position.
- Twin Deficit Problem:
- Coexistence of fiscal deficit and current account deficit.
Relevant Mains Points
- Structural Dependence on Oil Imports:
- Nearly 85% of oil consumed in India is imported, making the rupee vulnerable to global oil price shocks.
- Policy Challenges and Strategic Shifts Needed:
- Greater investment in:
- Renewable energy
- EV ecosystem
- Domestic oil exploration
- Hydrogen-based fuels (Green Hydrogen Mission)
- Greater investment in:
- Trade Negotiations & Global Market Strategy
- Bilateral trade deals (with UAE, Japan, ASEAN) favour foreign imports more than exports, worsening trade balance.
- India must negotiate balanced agreements ensuring domestic competitiveness.
- Economic Growth vs Currency Stability
- Monetary tools alone cannot stabilise a structurally weak currency; trade and energy reforms are key.
Way Forward
- Reduce oil import dependency through:
- Faster EV transition
- Green energy expansion (solar, wind, hydrogen)
- Incentivising domestic refining and exploration
- Strengthen export competitiveness through logistics reforms and FTAs that benefit Indian industry.
- Improve fiscal management to reduce macroeconomic vulnerabilities.
UPSC Relevance:
- GS-III: Economy — External Sector, Currency Stability, Energy Security
- GS-II: Trade Agreements, Economic Policy Decisions
Prelims: CAD, Forex Reserves, Managed Float, Petroleum Import Dependency