The Indian rupee has once again fallen sharply against major foreign currencies, with the exchange rate touching around ₹88.15 to a U.S. dollar and ₹119.25 to a British pound last week. This decline is not unprecedented—the rupee has been losing value against foreign currencies since India gained independence. The question, however, is how fast and why it is falling this time.
In the global foreign exchange market, currencies are bought and sold based on demand and supply. When the demand for the U.S. dollar rises while its supply remains limited, its value naturally increases against the rupee. Economists call such a market-driven decline of the rupee “depreciation,” while a government-enforced reduction in value is termed “devaluation.” The current slide is depreciation, not devaluation, though in practical terms, both mean the rupee buys less and the dollar costs more.
The immediate reasons for this depreciation are twofold. First, the United States under President Trump has imposed a steep 50% tariff on Indian exports, which has only just taken effect. This will likely reduce Indian exports, worsen the trade balance, and increase reliance on foreign borrowing. As a result, India will need more dollars to pay for imports while earning fewer from exports, pushing up demand for the dollar.
Second, foreign portfolio investors have been withdrawing heavily from Indian equity markets. In this financial year alone, they have pulled out around $9.7 billion, converting their holdings back into dollars and repatriating them. In just two days recently, $1 billion worth of shares were sold off. These companies do not invest out of charity; they seek profit, and when they sense that India’s economic growth may slow—partly due to the U.S. tariffs—they exit quickly. With foreign capital fleeing, demand for dollars has shot up, pulling the rupee down.
The Reserve Bank of India has significant foreign exchange reserves—about $691 billion—but there are limits to how much it can intervene by selling dollars. Much of this reserve is borrowed, not earned through trade, and it has already shrunk by $4.39 billion in the past week. Reducing imports would be another way to ease dollar demand, but India’s history shows this is easier said than done. Since independence, there have been only two years—1972–73 and 1976–77—when import spending was less than export earnings. Even after the slogan of “Atmanirbhar Bharat” was raised in 2020, India has consistently imported more than it exports.
External debt adds to the problem. India’s foreign debt now stands at $736 billion, up sharply from $441 billion in March 2014. Repayments must be made in dollars, which only increases dollar demand and weakens the rupee further.
The conclusion is stark: unless imports are curbed and foreign debt reduced, the rupee will continue to weaken. The dollar touching ₹100 no longer seems an impossibility. For decades, wise voices have warned that a nation addicted to borrowing and spending beyond its means will face such currency crises. Today, India finds itself repeating that lesson—the rupee keeps tumbling, and will keep tumbling, so long as the fundamentals remain unchanged.
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*Senior economist based in Ahmedabad
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