Introduction

In recent years, the Indian Rupee has undergone significant depreciation against the US Dollar, emerging as one of India’s most pressing macroeconomic concerns. Specifically, the currency weakened from around ₹74 per dollar in early 2022 to historic lows near ₹90 per dollar by December 2025. Notably, the rupee touched ₹90.585 on December 13, 2025, marking one of its sharpest declines in recent history.

Against this backdrop, this article critically examines the current state of the rupee, the underlying causes of depreciation, its economic consequences, and the policy responses adopted by the Reserve Bank of India (RBI).

Current State of the Rupee

Recent Performance

To begin with, 2025 has been particularly challenging for the Indian Rupee. During the year, it depreciated by approximately 4.74% against the US Dollar, making it one of the weakest-performing Asian currencies. From a level of ₹83.12 per dollar in January 2024, the currency has faced sustained downward pressure.

Importantly, between December 2022 and December 2024, the rupee remained relatively stable with only modest depreciation. However, this stability gave way to accelerated weakening during late 2024 and throughout 2025, indicating mounting external and domestic pressures.

International Comparison

Despite this decline, the rupee had earlier demonstrated relative resilience among emerging market currencies. For instance, in 2024, it depreciated by only 1.5%, making it one of the least volatile currencies in Asia.

Nevertheless, conditions deteriorated sharply in 2025, with the rupee falling nearly 6% against the US dollar, thereby placing it among the worst-performing Asian currencies. This shift underscores the intensification of currency stress in the current year.

Causes of Rupee Depreciation

1. Strengthening US Dollar

First and foremost, the global strength of the US Dollar has been the dominant external factor. The US Federal Reserve’s aggressive monetary tightening has triggered capital outflows from emerging markets, thereby boosting the dollar’s value worldwide. As a result, the appreciating Dollar Index has exerted sustained pressure on currencies like the rupee.

2. Widening Trade Deficit

In addition, India’s persistent trade deficit remains a major structural weakness. In October 2024, the trade deficit widened to $27.14 billion, primarily due to heavy imports of crude oil, gold, and electronics.

Since India imports 85% of its crude oil and remains one of the world’s largest gold importers, this creates continuous demand for dollars, thereby weakening the rupee when imports exceed exports.

3. Foreign Portfolio Investment (FPI) Outflows

Furthermore, capital outflows have significantly amplified rupee weakness. Between July and November 2025, Foreign Institutional Investors sold Indian equities worth ₹1.5 lakh crore.

Owing to concerns over valuations, global trade tensions, and better opportunities elsewhere, FPIs have withdrawn $16.5 billion since August 2025, directly increasing dollar demand.

4. US Trade Tariffs and Policy Uncertainty

Compounding these challenges, a 50% US tariff on several Indian exports widened India’s trade deficit with its largest trading partner. This reduced export competitiveness, curtailed dollar inflows, and heightened uncertainty regarding India’s export outlook, thereby dampening investor confidence.

5. Inflation Differential

Simultaneously, higher domestic inflation has contributed to currency depreciation. In October 2024, India’s retail inflation stood at 6.21%, breaching the RBI’s target range.

When inflation in India exceeds that of trading partners, the purchasing power of the rupee erodes, making Indian goods less competitive globally.

6. Global Economic Factors

Finally, the broader global environment has been unfavourable. Geopolitical conflicts, supply chain disruptions, and global growth uncertainties have driven investors toward safe-haven assets like the US Dollar, further pressuring the rupee.

Advantages of Rupee Depreciation

Despite its challenges, rupee depreciation also offers certain economic advantages.

1. Boost to Export Competitiveness

A weaker rupee lowers export prices in dollar terms, benefiting sectors such as IT, textiles, pharmaceuticals, and manufacturing. Over time, this can help improve the trade balance.

2. Increased Remittance Value

Similarly, depreciation enhances the rupee value of remittances sent by Indians abroad. As the world’s largest remittance recipient, India benefits from higher household purchasing power.

3. Encouragement for Import Substitution

Moreover, rising import costs can encourage domestic production, supporting the government’s Atmanirbhar Bharat objectives.

4. Tourism Revenue Enhancement

Additionally, a weaker rupee makes India a more affordable tourist destination, boosting foreign exchange earnings from tourism.

Disadvantages of Rupee Depreciation

1. Higher Import Costs and Inflation

On the downside, depreciation raises import costs, particularly for crude oil. Research indicates that a 5% rupee fall can raise inflation by 25–30 basis points, affecting the entire economy.

2. Increased External Debt Burden

As of June 2024, India’s external debt stood at $682.3 billion. A weaker rupee increases repayment costs, straining both public and corporate finances.

3. Impact on Education and Travel Abroad

Consequently, studying and travelling abroad become costlier. With over 7.5 lakh Indian students abroad, depreciation significantly raises financial burdens.

4. Reduced Investment Confidence

Persistent depreciation may signal macroeconomic instability, prompting further capital outflows and reinforcing a vicious cycle.

5. Corporate Sector Challenges

Finally, firms dependent on imported inputs face higher costs and squeezed margins, particularly in electronics and automobiles.

RBI’s Response and Measures

Forex Market Interventions

To manage volatility, the RBI sold nearly $50 billion between Nov 2024 and Nov 2025. It intervenes selectively to prevent disorderly movements.

Strategic Shift

Since late 2024, the RBI has shown greater tolerance for gradual depreciation, acknowledging market forces and conserving reserves.

Currency Swaps and Reserve Management

Swap operations and reserves of $698 billion (Sept 2025) provide buffers, covering 11 months of imports.

Monetary Policy Adjustments

Interest rate decisions remain crucial in balancing inflation control and capital flows.

Comprehensive Policy Measures for Stability

Short-Term Measures

• Controlled forex intervention
• Liquidity management
• Import rationalisation

Medium to Long-Term Reforms

• Export promotion (PLI, FTAs)
• Attracting FDI
• Reducing energy dependence
• Currency diversification
• Fiscal consolidation
• Inflation control
• Manufacturing strengthening

Expert Outlook and Projections

Looking ahead, experts project the rupee may stabilise in the mid-to-high 80s, though 8–10% depreciation remains possible.

However, strong GDP growth (8.2%), robust reserves, and manageable debt offer resilience. The IMF’s reclassification of India’s exchange rate regime suggests greater market determination with policy oversight.

Conclusion

In conclusion, rupee depreciation presents a mixed economic outcome. While it boosts exports and remittances, it also raises inflation, debt servicing costs, and investment risks.

The RBI’s pragmatic approach—balancing market forces with targeted intervention—has prevented disorderly depreciation. Nonetheless, long-term currency stability depends on structural reforms, export diversification, energy security, inflation control, and sustained macroeconomic discipline.

Ultimately, the rupee’s trajectory will reflect India’s ability to strengthen its external sector while adapting to a volatile global economy.