The Indian rupee has recently faced significant depreciation pressures, reaching an all-time low of 85.8075 against the U.S. dollar on December 27, 2024. This decline is attributed to several factors, including sustained foreign portfolio outflows, overstretched stock valuations, and a widening trade deficit. The Reserve Bank of India (RBI) has actively intervened in the foreign exchange market to curb volatility, utilizing the country’s forex reserves, which have consequently fallen to a seven-month low of $644.39 billion as of December 20.
The strengthening of the U.S. dollar, bolstered by rising U.S. Treasury yields and expectations of inflationary policies under President Donald Trump’s administration, has further exacerbated the rupee’s depreciation. Additionally, concerns over India’s economic growth, reflected in faltering consumption and hesitant investments, have intensified the currency’s downward trajectory. While a depreciating rupee can enhance export competitiveness, it also poses risks such as imported inflation, particularly for essential commodities like crude oil and edible oils.
The RBI’s interventions, though effective in providing short-term relief, are not sustainable long-term solutions, especially given the finite nature of forex reserves. Policymakers must address underlying economic challenges to bolster the rupee’s stability. This includes implementing structural reforms to stimulate domestic consumption and investment, thereby reducing reliance on foreign capital inflows.
Furthermore, clear communication regarding India’s stance on currency matters is essential to maintain investor confidence and mitigate speculative attacks on the rupee. To sum it up, while external factors have undeniably impacted the rupee’s value, strengthening domestic economic fundamentals remains crucial. A multifaceted approach, combining prudent fiscal policies with strategic market interventions, is imperative to navigate the complexities of the global financial landscape and ensure the rupee’s resilience in 2025 and beyond. It’s high time the government took the rupee depreciation seriously and acted decisively, as nothing concrete has been done so far.
