Relevance: GS-3 (Indian Economy – External Sector) | Source: Indian Express
The Indian rupee slipped below the psychologically critical ₹90 per U.S. dollar amid persistent foreign outflows, a widening trade deficit, and weak global sentiment.
Major Causes of the Decline
Cause | Explanation |
| Foreign portfolio outflows | Investors pulled out funds due to global uncertainty and better returns elsewhere. |
| Rising import bill | Higher commodity prices, especially oil and gold, widened the current account gap. |
| Weak export growth | Electronics, engineering goods, and textiles saw slower year-on-year expansion. |
| Strong U.S. dollar | The dollar strengthened globally due to tight U.S. monetary policy. |
| Limited Reserve Bank of India intervention | The Reserve Bank of India allowed market-driven adjustment, favouring a gradual depreciation rather than sharp defence. |
Impacts
Positive | Negative |
| Boosts export competitiveness (if global demand is strong). | Costlier imports → higher inflation (oil, electronics, edible oils). |
| Encourages domestic substitution for imports. | Worsens the current account deficit. |
| May attract tourism and remittances. | Raises cost of external borrowing and foreign education. |
| Supports services exports (Information Technology and Business Process Management). | Can trigger further capital outflows if volatility persists. |
Q. Which of the following factors can cause a currency to depreciate?
- Persistent portfolio outflows
- Rising trade deficit
- Higher domestic inflation relative to trading partners
- Increase in global crude oil prices
Select the correct answer:
(a) 1 and 2 only
(b) 1, 2 and 3 only
(c) 2, 3 and 4 only
(d) 1, 2, 3 and 4
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