Why’s the rupee sliding and how it’s reshaping the economy?

Today, we’ll dive into why the Indian rupee is weakening and what it means for the economy

The News

On January 14, 2025, the Indian rupee hit an unprecedented low of ₹86.65 against the US dollar.

Over the past three months, the currency has slipped by ~3%, reflecting mounting economic challenges and financial turbulence.

The decline is due to multiple factors, including a strong US economy and increased foreign investor outflows from India.

What’s pulling the rupee down?

1. The Indian currency has weakened due to strong US economic performance and slower-than-expected rate cuts by the Federal Reserve. This shift has reduced the attractiveness of currencies from major developing economies.
2. Overseas investors have withdrawn substantial funds, with equity outflows exceeding $2.7 billion this month, following $11 billion in the previous quarter.
3. A significant reduction in foreign exchange reserves, down $5.7 billion in early January, has left the Reserve Bank with fewer options to stabilize the situation.

The falling rupee is expected to drive some major economic consequences on the overall economy.

Economic Consequences

Mounting inflationary pressures: Essential imports like oil, fertilizers, and pulses will become costlier, pushing up living expenses and inflation.

Imbalance in external trade: Higher import costs will widen the trade gap, with crude dependence adding to external vulnerabilities.

Fiscal challenges and policy hurdles: Rising subsidy costs strain public finances, limiting resources for growth and impacting fiscal stability.
India’s growth forecast for FY25 stands at 6.6%, as retail inflation eases to 5.22%.

However, the weakening rupee adds pressure- straining imports while offering relief to export-driven sectors.

Sectors Impacted negatively

Electric Vehicles (EV): Reliance on foreign-made components, which account for 70% of EV manufacturing, has increased production expenses.

Transportation: Soaring crude oil costs, exacerbated by the rupee’s fall, have led to steep hikes in fuel expenses. The impact cascades through the supply chain, driving up freight charges and making goods more expensive for consumers.

Sectors Impacted positively

IT and Software Services: The depreciation directly benefits IT companies, whose revenues are dollar-linked, by boosting their rupee-denominated earnings.

Export-oriented industries: Sectors such as textiles and pharmaceuticals gain a significant edge, as the currency shift makes Indian goods more attractive in international markets.

As per the major banks & analysts’ estimates, the rupee faces further downside, with forecasts placing its value between ₹86.25-88 by March 2025.

A slide beyond ₹90 later in the year remains possible, especially if global risks such as trade disputes and a strong US currency persist.

RBI’s stance

The Reserve Bank has taken steps to counter the rupee’s fall, including selling forex reserves, which have dropped from ₹704 billion in September 2024 to ₹634 billion in January 2025. While these interventions have reduced immediate disruptions, the broader depreciation persists.

In addition, RBI is also using forward market operations, where it agrees to buy or sell foreign currency at a fixed price for delivery at a future date, to control the flow of currency and ease the pressure, aiming for short-term relief and economic stability.

To Conclude

The RBI appears to be stepping back from aggressive interventions, enabling the exchange rate to adjust more freely.

While challenges remain, experts believe this balanced approach could strengthen India’s global trade. Future trends will depend on global monetary policies and the RBI’s actions.