Context:
On December 3, 2025, the Indian rupee breached the ₹90 per US dollar mark, triggering debate on whether the fall reflects a macroeconomic crisis or a deliberate recalibration of exchange rate policy by the Reserve Bank of India (RBI). The movement comes amid global trade disruptions, capital outflows, and a visible shift in RBI’s intervention stance.
Key Highlights:
Macroeconomic Factors Driving Rupee Depreciation:
- Falling exports, especially to the United States due to tariff-related demand contraction.
- Exports to the U.S. declined by 12% in September and 9% in October 2025.
- Surging imports, particularly:
- Gold and silver imports up by nearly 200% in October 2025.
- Foreign Portfolio Investors (FPIs) pulled out nearly $17 billion in 2025, the highest annual outflow in 20 years.
RBI Policy Shift / Monetary Strategy:
- RBI reduced direct market intervention.
- Shift from defending a specific rupee level to allowing the currency to find its own level.
- Continued adherence to a managed-float exchange rate regime, focusing on smoothing volatility, not fixing rates.
Significance / Concerns:
- A weaker rupee may improve export competitiveness.
- However, it can also increase imported inflation, especially for energy and precious metals.
- Economists remain divided on whether depreciation can offset tariff-induced export losses.
Relevant Prelims Points:
- Issue & Causes:
- Global protectionism (U.S. tariffs).
- Capital outflows by FPIs.
- Rising trade deficit due to import surge.
- Key Economic Concepts:
- Foreign Portfolio Investors (FPIs): Short-term investors in equities and debt markets.
- Trade Deficit: Excess of imports over exports.
- Managed-Float System: Exchange rate determined by market forces with limited RBI intervention.
- Impact:
- Depreciation increases cost of imports and may fuel inflation.
- Export benefit depends on price elasticity of demand and global conditions.
Relevant Mains Points:
- Facts & Policy Context:
- Between mid-2022 and late-2024, RBI heavily intervened to keep the rupee stable despite current account and capital account pressures.
- The 2025 shift indicates acceptance of macro fundamentals over symbolic stability.
- Conceptual Linkages:
- Exchange rate management vs inflation targeting.
- External sector stability and capital flow volatility.
- Balance between growth support and price stability.
- Way Forward:
- Strengthen export diversification beyond traditional markets.
- Curb non-essential imports, especially gold, through policy tools.
- Maintain credible communication by RBI to anchor expectations.
- Complement exchange rate flexibility with fiscal and trade reforms.
UPSC Relevance (GS-wise):
- GS 3: Indian Economy, External Sector, Monetary Policy.
- GS 2: Role of RBI, economic governance.
- Prelims: Exchange rate regimes, FPIs, trade deficit, RBI policy tools.