Is the Depreciation of the Rupee a Profit or a Loss?

At a time when Prime Minister Narendra Modi confidently states that India is functioning as a growth driver for the global economy and as a global growth engine, concerns are being expressed about the potential adverse impact on the country's economy as the rupee's exchange rate against the dollar falls to an all-time low of 90 rupees. If this depreciation continues in the same manner, it would not be surprising if the rupee's exchange rate drops to 100 rupees. In the early days after independence, the rupee-dollar exchange rate was 3.30 rupees, but after the introduction of new liberalization economic policies in 1991, the rupee rapidly lost its value. The rupee exchange rate, which continued at around 83 rupees in 2024, has now reached 90 rupees, strengthening such suspicions. While the depreciation of the rupee in this way is causing concern, the government is taking it lightly. Finance Minister Nirmala Sitharaman says that the depreciation of the rupee is not entirely negative, that its value is determined by market forces, that the rupee's exchange rate against the dollar has decreased but the rupee is not weak. India's Chief Economic Advisor V. Anantha Nageswaran expresses confidence that there is no need to worry as the current rupee depreciation will have no impact on inflation or exports.

The worrying aspect is that the Indian rupee is more affected than the currencies of other Asian countries. The main reason for this is the commercial decisions taken by Donald Trump after assuming the U.S. presidency for the second time, the imposition of retaliatory tariffs, and the measures taken by the U.S. Federal Reserve to strengthen the dollar. Primarily, the deadlock in U.S.-India trade talks, the U.S. imposing 50% tariffs on Indian exports, foreign portfolio investors withdrawing nearly 17 billion dollars in investments, the decline in foreign direct investment and remittances, and investors rushing to buy dollars as the dollar strengthens, leading to increased dollar demand and the rupee-dollar exchange rate falling to its lowest level.

Although different arguments are being heard about the depreciation of the rupee, and regardless of political criticisms, the rupee's depreciation may not immediately have a severe negative impact on the economy, but in the long term, the chances of more losses than gains from the rupee's fall appear visible. If the government voluntarily depreciates the rupee's value (devaluation) to encourage exports, it will bring favorable results to some extent in the export sector along with certain segments. In 1966 to reduce inflation, and in 1991 due to declining foreign exchange reserves to overcome the deficit in the balance of payments, the P.V. Narasimha Rao government depreciated the rupee's value, but the current development is the rupee's depreciation (depreciation) due to market forces, so this weakening will yield negative results. As J.P. Morgan India Chief Sajid Chinoy says, the rupee's depreciation can be useful to some extent in making Indian goods cheaper globally, making imports burdensome, helping domestic manufacturers, creating jobs, and curbing dumping of cheap Chinese goods, but this benefit will be limited.

In economic terms, there is an inverse relationship between the rupee's value and price levels, so if the rupee depreciates, prices rise, meaning inflation occurs in the economy, resulting in reduced purchasing power of the people, reduced demand for goods, and the risk of reduced investments and jobs. However, the government can correct the situation to some extent through recent GST slab reductions and RBI monetary policy. Naturally, rupee depreciation encourages exports and discourages imports, creating a possibility of favorable foreign exchange reserves, but due to Trump's tariff increases, there is a risk that the expected benefits in the export sector may not materialize even if the rupee depreciates, so there is a chance that the rupee's fall will harm India's economic interests. Since India imports 90% of its oil, 60% of edible oils, and items like electronic goods, fertilizers, chemicals, and machinery from other countries, their prices will also rise with the rupee's depreciation. Similarly, the inflation caused by rupee weakening will have a negative impact on the transportation system and the country's economy.

To prevent the rupee's depreciation, measures taken by the RBI through monetary policy, such as interest rate hikes and open market operations, provide temporary relief, but instilling confidence in foreign investors, reducing foreign imports, increasing domestic production and purchases under the 'Vocal for Local' slogan, trading in native currencies with partner countries including Russia, expanding India's foreign market, attracting portfolio investments, increasing foreign exchange reserves, and strengthening the economy through increased domestic investments, savings, and consumption are needed to curb the rupee's fall. However, this is not so easy either—Trump is describing India and Russia as "dead economies" and warning American companies not to invest in India. Not only is America India's main trading partner, but during trade talks, America is pressuring India to open its market to American agricultural products. Therefore, even if India achieves significant growth rates in the future (current growth rate 8.2%) and emerges as the third largest economy, market forces will determine the rupee's value.

Dr. Tirunahari Sheshu
Lecturer in Economics
Kakatiya University
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