The Indian Rupee depreciated to a record low of ?90.43 per US dollar, driven by foreign fund outflows and uncertainty surrounding the India–US trade deal. With a year-to-date depreciation of about 5%, the rupee has emerged as the worst-performing Asian currency in 2025.

What is Rupee Depreciation?

Rupee depreciation refers to a decline in the value of the Indian Rupee (INR) relative to major foreign currencies, particularly the US dollar. It occurs when more rupees are required to purchase one unit of foreign currency, mainly due to market-driven demand and supply forces.

Impact of Rupee Depreciation

Rupee depreciation has both positive and negative economic consequences.

Positive Impacts

• Boost to Exports: A weaker rupee makes Indian goods cheaper in international markets, benefiting export-oriented sectors such as IT services, pharmaceuticals, textiles, and engineering goods.

• Higher Value of Remittances: Non-Resident Indians (NRIs) receive more rupees per dollar remitted, encouraging higher remittance inflows.

• Domestic Production Incentive: Costlier imports can promote import substitution and encourage local manufacturing, supporting initiatives like Make in India.

Negative Impacts

• Imported Inflation: The cost of essential imports such as crude oil, fertilisers, electronics, and edible oils rises, leading to higher inflationary pressures.

• Higher Debt Servicing Costs: Indian companies and governments with foreign-currency-denominated debt must pay more rupees to service the same dollar liability.

• Widening Trade and Current Account Deficits: Even if import volumes remain unchanged, a higher import bill can widen the trade deficit and current account deficit (CAD).

• Risk of Capital Flight: Sustained depreciation can reduce foreign investor confidence, triggering further outflows from equity and debt markets.

• Reduced Consumer Purchasing Power: Rising prices of imported goods weaken domestic consumption and demand.

Devaluation vs Depreciation of Currency

Factors Causing Rupee Depreciation

The depreciation of the Indian rupee is the result of a combination of external shocks, trade imbalances, and capital flow pressures.

1. Sustained FPI Outflows

Foreign Portfolio Investors (FPIs) have withdrawn over ?1.48 lakh crore since January 2025, reallocating capital to markets offering higher returns and lower risk.
At the same time, rising global geopolitical uncertainties have increased demand for the US dollar as a safe-haven currency, putting downward pressure on the rupee.

2. US–India Trade Deal Uncertainty

Delays in finalising the India–US trade agreement have created uncertainty regarding future tariffs, market access, and export competitiveness.
This uncertainty has weakened investor confidence in India’s external sector prospects, contributing to rupee depreciation.

3. Higher Dollar Demand from Importers

Rising imports—particularly gold, electronics, and capital machinery—have increased demand for US dollars.
As importers buy more dollars to settle payments, the demand–supply imbalance in the forex market has accelerated rupee depreciation.

4. Widening Trade Deficit

India’s merchandise exports declined by 11.8% in October 2025, while imports surged by 16.6%.
The simultaneous fall in exports and rise in imports has significantly widened the trade deficit, increasing pressure on the rupee.

5. High Crude Oil Prices

Elevated Brent crude oil prices have expanded India’s oil import bill, worsening the trade deficit.
Since India is a net oil importer, higher crude prices directly weaken the rupee.

6. Surge in Gold Imports

Gold imports increased by nearly 200% in October 2025, driven by high domestic demand and price volatility.
Although higher gold prices raised the nominal value of gold reserves, this gain was insufficient to offset the sharp rise in the import bill, thereby widening the current account deficit (CAD) and adding to depreciation pressures.

How Can the Indian Rupee Be Strengthened?

A combination of external sector reforms, rupee internationalisation, and domestic macroeconomic stability is required to strengthen the rupee.

1. Expand Rupee-Based Trade Settlement

India should scale up Special Vostro Rupee Accounts (SVRAs) with more trading partners to reduce dependence on the US dollar.
Promoting Local Currency Settlement (LCS) agreements with countries in Asia, Africa, and the Gulf can lower dollar demand in trade.
Bilateral MoUs for INR-based invoicing and payments should be increased.

2. Deepen the Global Market for INR

Developing a 24×7 global forex market for the Indian rupee will allow international banks to trade INR more actively.
Supporting the inclusion of Indian government securities (G-secs) in major global bond indices can attract stable, long-term foreign inflows.
Simplifying KYC norms and onboarding processes for FPIs and global custodians will improve investor participation.

Enabling Indian banks to lend in INR to non-residents and promoting Masala Bonds will further expand offshore rupee usage.

3. Strengthen External Sector Stability

India should expand currency swap agreements to ensure liquidity support during periods of volatility.
Maintaining strong foreign exchange reserves and ensuring calibrated RBI intervention can help manage excessive currency fluctuations.
Export competitiveness should be enhanced through structural reforms, not merely through currency depreciation.

4. Boost Global Acceptance of the Rupee

The international expansion of UPI-based digital payments can increase global acceptance of the rupee.
Efforts should continue to position the rupee for inclusion in the IMF’s Special Drawing Rights (SDR) basket, enhancing its credibility as a potential reserve currency.

5. Domestic Reforms to Support a Strong Rupee

Reducing the trade deficit by diversifying export markets and promoting high-value manufacturing is essential.
Gold imports can be curbed through gold monetisation schemes and digital gold alternatives.
Maintaining low inflation, fiscal discipline, and policy stability will attract sustained capital inflows and support currency strength.

Conclusion

The rupee’s depreciation is driven by weak exports, high imports, volatile commodity prices, and sustained capital outflows. Strengthening the currency requires a multi-pronged strategy focused on export competitiveness, reduced import dependence, rupee internationalisation, and stable macroeconomic policies. Over time, these measures will help restore confidence and ensure long-term stability of the Indian rupee.

Indian Rupee Depreciation

• In 2022, the Indian Rupee saw a 10% decline against the US dollar, making it the worst-performing Asian currency.
• This decrease was mostly caused by the US dollar's rise as a result of its safe-haven appeal during global recession and inflation fears as well as the Russia-Ukraine war.

In 2022, How did the rupee perform?

• The rupee hit a record low against the dollar of 83.2 during the year. Other Asian currencies depreciated to a lower amount than the rupee.
• The value of the Chinese Yuan, Philippine Peso, and Indonesian Rupiah declined by about 9% during the year. Malaysian Ringgit and South Korean Won both had declines of between 6% and 7%, respectively.
• The Reserve Bank of India (RBI), however, actively interfered in the foreign exchange market to support the rupee. The nation's foreign exchange reserves have decreased by USD 70 billion since the start of 2022. As of December 23, 2022, it was worth USD 562.81 billion.
• Although there has been some erosion of reserves, the central bank is now beginning to rebuild them, which will serve as a safety net in uncertain times.

What caused capital outflows, and why?

• In 2022, the US Fed aggressively increased interest rates by 425 basis points (bps) to combat inflation. Due to the increased interest rate difference between the US and India as a result, investors began to invest in the US market instead of the domestic one in order to benefit from the higher rates.
• The highest-ever yearly net outflow was made by Foreign Portfolio Investors (FPIs) in 2022 when they withdrew Rs 1.34 lakh crore from Indian markets.
• The currency was under pressure in 2022 as they withdrew Rs 1.21 lakh crore from the equity markets and Rs 16,682 crore from the debt market.
• The invasion of Ukraine by Russia aggravated the FPI withdrawals, while the global economic recession made it more difficult for inflows.

What would the depreciation's effects be on the Indian economy?

Positive:

• In theory, a weaker rupee should increase India's exports, but given the current state of global uncertainty and the country's weak demand, this may not be the case.

Negative:

• It raises the possibility of imported inflation and may make it more challenging for the central bank to sustain historically low-interest rates for a longer period of time.
• Over two-thirds of India's domestic oil needs are satisfied by imports.
• Among the major importers of edible oils is India.
• A weaker currency will drive up the price of imported edible oil and food inflation.

What is the Rupee Forecast for 2023?

• Although the outlook for the rupee is still bleak in the immediate term, India's economy continues to grow at the quickest rate, thus the local currency's decline may not last much longer.
• Although the US Fed's terminal interest rate was anticipated, their monetary policy cannot continue to be tightened indefinitely.
• The tide will undoubtedly change once the (US Fed) tightening is completed.