While there has been moderate appreciation from time to time, the asymmetric policy interventions to deal with Rupee fluctuation is partly responsible for disproportional nominal exchange rate depreciation. Depreciation of Indian Rupee has been a long-lived phenomenon. Why does the Rupee keep falling? There have been several episodes of depreciation in two decades accompanied by rapid growth of the Indian economy.
Notable episodes of Rupee fall include Sep-Nov 2008 (from 45 to 50 per dollar), July-August 2013 (from 60 to 67 per dollar), August-September 2018 (from 68 to 74 per dollar), and the recent October-December 2024 (Rupee crossed 85 per dollar). However, there is something common in these episodes.
Most often, India’s inherent dependence on oil imports makes the country vulnerable to swings in oil shocks. Geopolitical events, reversal of capital flows to the West, the US Fed’s actions, poor export performance and lackluster tourism flows are prominent.
While there has been moderate appreciation from time to time, the asymmetric policy interventions to deal with Rupee fluctuation is partly responsible for disproportional nominal exchange rate depreciation. Not allowing the rupee to appreciate fully during periods of net capital inflows has been done to support the export sectors and to accumulate foreign exchange reserves.
Foreign Institutional Investment (FII) and Foreign Direct Investment (FDI) In October 2024, net portfolio investment remained negative. Outflows on account of FII withdrawal amounted to USD 10.975 billion. The outflow continued through December, and it is likely to last till the uncertainty over the US economy under the Trump presidency subsides.
The interest rate cycle and the US Fed going slower on rate cut could lead to further withdrawal from emerging markets. On the other hand, FDI rebound is slow due to near-shoring and inward looking measures in different countries.
Perennial Trade deficit Total goods exports from India was 437 billion in 2023-24. In the first 10 months of FY 2025, the goods exports have remained subdued at 252 billion. While imports have also reduced in the current fiscal, the trade deficit is expected to be close to 200 billion for the full year. India’s trade deficit is not only with China but also with several other countries.
There are at least 10 countries (Italy, Switzerland, Japan, Korea, HK, Indonesia, IRAQ, Saudi, Russia, UAE, China) which have got more than 10 billion trade surpluses with India. India needs to have a strategy for more balanced trade with all of them. On the other hand, India has a trade surplus of 10 billion or more with only two countries in the past two years (USA, Netherlands) which can vanish under the Trump tariff and the Carbon Border Adjustment Mechanism (CBAM) through the European Union (EU).
India often does not benefit from fall in Rupee due to its import bill exceeding that of exports. Although nominal exchange rate is much talked about, REER appreciation is to be seen which reflects competitiveness of a currency. India’s REER index stood at 108.14 in November 2024 reflecting real appreciation hurting export competitiveness.
International tourist rebound yet to happen Foreign tourist arrival remains below pre-pandemic levels. During January-August 2024, 61.9 lakh foreign tourists visited India compared to 69.1 lakh during the same period of 2019. In terms of foreign exchange earnings, it translated to US$ 20.55 billion during January-August 2024 compared to US$ 19.75 billion in the same period of 2019.
The dollar value is higher by 4.06% which reflects higher spending partly due to price rise compared to the pre-pandemic years. A rebound of tourist arrival over and above the pre-pandemic level can contribute at least USD 3.6 billion annually. The majority of foreign tourists (44.77%) come for leisure, holiday and recreation. Further investment in the segment is required. In addition, international student arrival is still less than one percent of foreign tourist arrival which requires improvement.
Outbound tourism from India continues to break records. Indian nationals’ departure crossed the 2 crore mark during Jan-Aug 2024, an increase of 9.41% from the same period last year. This is also higher than pre-pandemic level. During Jan-Aug 2019, Indian nationals’ departure was 1.79 crore. Leisure holiday and recreation is reported to be the top purpose of Indian tourists.
Currency Block To avoid the exchange rate risk, Indians have been promoting use of Rupee in import settlement albeit with limited success. Exports that are inelastic in nature will benefit even if rupee depreciates as their receivables will be high in rupee terms.
However, imports will have to pay more in rupee terms when there is depreciation. Import settlement in Rupee could minimize these risks. While most of the prevailing measures deal with Rupee settlement for exports, import settlement is an area where Indian economic diplomacy needs to keep up to. Rupee trading should be discussed with trade partners which are experiencing trade surplus with India.
The Kazan declaration by Brazil, Russia, India, China, South Africa (BRICS) included points about the need for an alternative financial settlement system, use of local currencies in trade settlements, proposals to create reinsurance capacity besides other issues. While the initiative by BRICS is yet to gather steam, which claims to be not targeting third countries, it has already caught the eyes of the West viewing it as an attempt to de-dollarization.
Whereas alternate payment mechanisms could facilitate trade in local currency, the dollar-dominated system is hard to replace as the US is having one of the robust and open financial systems. The dollar index represents the strength of the greenback in volatile days for a variety of reasons. The dollar index has been strengthening since October 2024.
India also has to carefully navigate the geopolitical complexity of joining any currency block. Improvement in fundamentals would be even more important for Rupee to be accepted for international settlements. Unless bilateral trade is balanced or in surplus, demand for Rupee by the rest of the world would be lagging its supply.
Cumulative depreciation since the onset of Ukraine war Cumulative changes in the month-end exchange rate with Jan 2022 as the base suggests that the BRICS currencies have stable properties. While the Ruble experienced appreciation due to fall in dollar demand, there was a depreciation of about 10% in 2022.
However, depreciation has been limited thereafter until the US presidential elation results. The latest pressure on these currencies are yet another reflection of economic and political developments in the US. The global economic uncertainty caused by expected trade war during Trump 2.0 and expected inflationary pressure have led to capital flight from emerging markets.
GDP Growth, innovation, productivity What is to be learnt? The greater role of the Rupee in the Indian economy and beyond is bound to be seen as her share of the world economy rises. India currently is the third largest economy in terms of PPP behind China and the US, and fifth largest with 3.57 trillion GDP in current dollar terms. Stability of Rupee will continue to play a big role in supporting macroeconomic stability in the fast-growing economy.
To be able to become an elite international currency Rupee should be able to hold value contemporaneously and temporally. This is to be achieved without loss of international competitiveness. It must be supported by productivity growth, higher levels of innovation, moving up the industrial ladder with high value manufacturing and efficient service delivery.
(The authors are senior professors of economics; Views expressed are personal)
