Depreciation of Indian Rupee

• 06 Dec 2025

For Prelims: Depreciation of Indian Rupee,  Foreign portfolio investors, Current account deficit, Devaluation, Special Vostro Rupee Accounts 

For Mains: Causes and macroeconomic impact of currency depreciation in a developing economy, Effectiveness of rupee-based settlement mechanisms

Source: TH 

Why in News? 

The Indian rupee depreciated to a record low of 90.43 per US, driven by foreign fund outflows and India–US trade deal uncertainty, the rupee’s depreciation down 5% year-to-date has made it the worst-performing Asian currency in 2025.

What is Rupee Depreciation? 

• About: Rupee depreciation refers to a fall in the value of the Indian Rupee (INR) relative to major foreign currencies, especially the USD. 

Impact of Rupee Depreciation: 

• Positive: 
  • Boosts Exports: Indian goods become cheaper abroad; helps sectors like IT, pharma, and textiles. 
  • Higher Remittance Value: NRIs get more rupees per dollar sent home, encouraging greater remittance inflows. 
  • Domestic Production Push: Costlier imports may encourage local manufacturing. 
• Negative: 
  • Imported Inflation: Essential imports like crude oil, electronics, fertilisers become more expensive, pushing up inflation. 
  • Higher Debt Servicing Costs: Borrowers with foreign-currency loans must pay more rupees to service the same dollar debt. 
  • Widening Trade & Current Account Deficits: A costlier import bill expands deficits even if import volumes don’t rise. 
  • Risk of Capital Flight: Sustained depreciation weakens foreign investor confidence, triggering further outflows from equity and debt markets. 
  • Reduced Consumer Purchasing Power: Costlier imports weaken domestic demand. 

Devaluation vs Depreciation of Currency

Devaluation	Depreciation
A deliberate downward adjustment in the value of a currency by the government/RBI.	A market-driven fall in a currency’s value due to demand–supply forces.
Devaluation happens only under a fixed or pegged exchange rate system.	Depreciation usually happens under a floating or managed-floating exchange rate system (like India’s).
Devaluation is done to boost exports, reduce trade deficit, or stimulate growth.	Depreciation is caused by FPI outflows, high imports, inflation, widening CAD, global shocks, etc.

What are the Factors Causing Rupee Depreciation? 

• Sustained FPI Outflows: Foreign portfolio investors (FPIs) have pulled out over Rs 1.48 lakh crore since January 2025, shifting money to markets offering better returns.  
  • At the same time, global geopolitical risks have increased demand for the US dollar as a safe-haven asset. 
• US–India Trade Deal Uncertainty: Delays in finalising the trade agreement have created doubts about future tariffs and export competitiveness, weakening confidence in India’s external sector and adding pressure on the rupee. 
• Higher Dollar Demand from Importers: Rising imports especially gold, electronics, and machinery have led importers to buy more dollars, increasing demand for the greenback and contributing to rupee depreciation. 
• India’s Trade Deficit:  Merchandise exports dropped 11.8% in October 2025, while imports surged 16.6%. 
  • With exports weakening and imports rising sharply, the trade deficit has widened, adding pressure on the rupee. 
  • Higher Brent crude prices widen India’s import bill, worsening the trade deficit and weakening the rupee. 
• High Gold Imports: Gold imports grew nearly 200% in October 2025. Domestic high gold prices further worsened the import bill, and although rising prices boosted the value of gold reserves, it wasn’t enough to offset overall losses.  
  • These elevated gold imports have widened the current account deficit and added to the rupee’s depreciation pressures.

How can the Indian Rupee be Strengthened? 

• Expand Rupee-Based Trade Settlement: Scale up Special Vostro Rupee Accounts (SVRAs) with more countries to reduce dollar dependence. 
  • Promote Local Currency Settlement (LCS) agreements, especially with major trade partners in Asia, Africa, and the Gulf. 
  • Increase bilateral MoUs for INR-based invoicing and payment, lowering demand for USD in trade. 
• Deepen Global Market for INR: Develop a global INR forex market so international banks can trade Rupee round the clock. 
  • Support inclusion of Indian G-secs in major global bond indices, attracting long-term passive foreign flows.  
  • Simplify KYC, documentation, and onboarding norms for FPIs and global custodians. Enable Indian banks to lend in INR to non-residents, expanding offshore Rupee usage. Promote Masala Bonds for raising INR funds globally. 
• Strengthen External Sector Stability: Expand currency swap agreements to ensure liquidity support during volatility. 
  • Maintain strong forex reserves and calibrated RBI intervention to smooth disorderly movements. 
  • Promote export competitiveness through structural reforms rather than relying only on depreciation. 
• Boost Global Acceptance of INR: Continue UPI international expansion, making Rupee-linked digital payments widely accessible. 
  • Position the Rupee for International Monetary Fund (IMF) Special Drawing Rights basket inclusion, enhancing its credibility as a reserve currency. 
• Domestic Reforms to Support a Strong Rupee: Reduce trade deficit by diversifying export markets and boosting high-value manufacturing. 
  • Curb gold imports through policies like gold monetisation and digital gold options. Maintain stable inflation and prudent fiscal policy to attract steady capital flows. 

Conclusion 

The rupee’s fall stems from weak exports, high imports and sustained capital outflows. Strengthening it requires boosting export competitiveness and reducing import dependence. Stable macroeconomic policies and wider rupee-based trade will help restore confidence. 

Drishti Mains Question: 

Analyse the main drivers of the recent rupee depreciation and evaluate its macroeconomic implications for India.

Frequently Asked Questions (FAQs)

Q. What triggered the rupee’s fall to its record low value? 
The fall was driven by heavy FPI outflows, uncertainty over the India–US trade deal, and strong global demand for the US dollar as a safe-haven asset.

Q. What mechanism is India using to reduce dependence on the US dollar in trade? 
India is expanding Special Vostro Rupee Accounts (SVRAs) and Local Currency Settlement agreements to allow INR-based invoicing and payments. 

Q. How can inclusion of Indian G-secs in global bond indices help the rupee? 
It brings steady passive investment flows from global funds, improving foreign exchange liquidity and supporting rupee stability. 

Q. What is the key difference between devaluation and depreciation relevant for India? 
India experiences depreciation—a market-driven fall in rupee value—because it follows a floating/managed float exchange-rate system, not a fixed one.

Summary 

• The rupee hit a record low of Rs 90.43/USD due to heavy FPI outflows, uncertainty over the India–US trade deal, and rising dollar demand amid global geopolitical risks. 
• A widening trade deficit driven by falling exports, rising imports, high gold inflows, and expensive crude oil has added significant pressure on the rupee. 
• Rupee depreciation brings mixed effects: it boosts exports and remittances but worsens imported inflation, debt servicing costs, and capital flight risks. 
• Strengthening the rupee will require expanding INR-based trade settlement, improving capital flows, boosting export competitiveness, curbing gold imports, and maintaining strong macroeconomic stability.

UPSC Civil Services Examination Previous Year Question (PYQ) 

Prelims

Q1. Which one of the following is not the most likely measure the Government/RBI takes to stop the slide of the Indian rupee? (2019) 

(a) Curbing imports of non-essential goods and promoting exports 

(b) Encouraging Indian borrowers to issue rupee-denominated Masala Bonds 

(c) Easing conditions relating to external commercial borrowing 

(d) Following an expansionary monetary policy 

Ans: (d) 

Q2. Consider the following statements: 

1. The effect of devaluation of a currency is that it necessarily improves the competitiveness of the domestic exports in the foreign markets 
2. increases the foreign value of domestic currency 
3. improves the trade balance 

Which of the above statements is/are correct? 

(a) 1 only 
(b) 1 and 2 
(c) 3 only 
(d) 2 and 3 

Ans: (a) 

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Mains

Q. How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India? (2018)