Is Rupee Depreciation a Serious Concern?

Context:

• The Indian rupee has recently depreciated sharply, falling below ₹90 per US dollar.

• Experts attribute this decline to external pressures such as trade deficit widening and Foreign Portfolio Investment (FPI) outflows, rather than any major domestic economic weakness.

Key Highlights: – Causes and Implications of Rupee Depreciation

Economic Drivers / Case Facts

• The rupee’s fall is linked to negative external fundamentals, mainly:

  • Higher trade deficit

  • Persistent portfolio outflows

  • Rising demand for dollars in global markets

Agreement / Global Uncertainty

• Uncertainty over a possible India–US tariff deal has added pressure on the rupee, increasing investor caution.

Stakeholders Involved

• Foreign investors (FPIs)

• Indian exporters and importers

• Reserve Bank of India (RBI)

• Indian economy and consumers (via inflation impact)

Significance / Concerns

• Depreciation does not automatically signal economic crisis, but sustained volatility can affect trade and inflation dynamics.

Relevant Prelims Points:

• Trade Deficit

  • Occurs when imports exceed exports.

  • Higher import growth compared to exports increases dollar demand, weakening the rupee.

• Foreign Portfolio Investment (FPI)

  • Investment in financial assets like equities and bonds.

  • FPI outflows raise dollar demand, accelerating depreciation.

• Current Account Deficit (CAD)

  • The shortfall when a country’s total imports of goods, services, and transfers exceed exports.

  • A widening CAD puts downward pressure on the currency.

• Impact of Depreciating Rupee

  • Positive:

    • Boosts exports by making Indian goods cheaper globally

    • Can offset tariff-related pressures

  • Negative:

    • Makes imports costlier (oil, machinery, inputs)

    • May cause imported inflation

• RBI’s Role in Forex Market

  • RBI intervenes to reduce excess volatility, not to defend a fixed exchange rate.

  • Uses forex reserves to smooth fluctuations.

Relevant Mains Points:

• Does Rupee Depreciation Reflect Weak Economy?

  • Experts argue it does not, since India’s fundamentals remain strong:

    • Robust GDP growth

    • Healthy balance of payments position

    • Adequate forex reserves

    • Controlled inflation environment

• Export Competitiveness vs Import Burden

  • Weaker rupee can help exporters, but disrupts import-dependent industries.

  • Businesses importing raw materials face higher costs.

• Inflationary Risks

  • Depreciation may cause mild rise in imported inflation, especially for fuel and essential commodities.

• Way Forward

  • Maintain macroeconomic stability through:

    • Fiscal consolidation

    • Stable monetary policy

    • Export diversification

    • Managing volatility via calibrated RBI intervention

  • Focus on reducing structural trade deficits over the long term.

UPSC Relevance (GS-wise):

• GS 3 (Economy): Exchange rate management, trade deficit, CAD, inflation

• Prelims: Concepts of FPI, forex reserves, rupee depreciation impacts

• GS 3 (External Sector): Global uncertainty and capital flow volatility