Why this is in the news

In recent weeks the Indian rupee has slipped to new record lows near eighty-nine rupees for one United States dollar. This has happened in a period when the dollar has become stronger against many world currencies, and when global policies on trade and work visas have created new worries for exporters and service companies. 

India’s central bank, the Reserve Bank of India, is allowing the market to find the exchange rate while stepping in to reduce wild swings. A weaker rupee makes some Indian exports a little cheaper abroad, but it also raises the rupee cost of imports like crude oil, fertilisers, electronics and foreign education.

Key Concepts 

• Exchange rate: The price of one currency in terms of another. If the exchange rate is eighty-nine rupees for one United States dollar, you need eighty-nine rupees to buy one dollar.

• Appreciation and depreciation:
  
  • If the rupee appreciates, you need fewer rupees to buy one dollar (for example, from eighty-nine to eighty-five).
    
  • If the rupee depreciates, you need more rupees to buy one dollar (for example, from eighty-five to eighty-nine).
    This is different from devaluation or revaluation, which are one-time official changes under a fixed exchange rate system. India does not use a fixed system today.

• Nominal Effective Exchange Rate: This is a basket measure. It compares the rupee to the currencies of India’s major trading partners, weighted by how much we trade with them. It is “effective” because it looks at many currencies together, not just the dollar. It is “nominal” because it does not adjust for inflation. If this index goes up, the rupee is stronger on average; if it goes down, the rupee is weaker on average.

• Real Effective Exchange Rate: This is the same basket measure after adjusting for inflation differences between India and its trading partners. If prices in India rise faster than prices abroad, the real index will be higher even when the nominal index has not moved much. A higher real effective exchange rate usually means Indian goods are less competitive; a lower real effective exchange rate means they are more competitive.

• Floating exchange rate and managed float:
  
  • Under a pure float, the market alone sets the exchange rate.
    
  • Under a managed float (India’s system), the market sets the rate most of the time, but the Reserve Bank of India steps in to keep movements orderly and to avoid sudden shocks. It does not fix the rupee at a given number.

• Foreign exchange reserves: These are international assets held by the Reserve Bank of India. They include foreign currencies like dollars and euros, gold, and a special reserve asset of the International Monetary Fund explained below. Reserves are built up during good times and used to smooth volatility during bad times. India’s reserves in recent months have been around seven hundred billion United States dollars, which gives comfort against external shocks.

• Special Drawing Right: This is a reserve asset created by the International Monetary Fund. It draws its value from a basket that includes the dollar, the euro, the Chinese renminbi, the Japanese yen and the British pound. It is not a currency that you can spend in a shop. Countries can exchange it for usable currency to handle pressure in their foreign payments.

• Balance of payments: This is the full record of India’s transactions with the world. Two big parts matter for the rupee:
  
  • The current account, which includes trade in goods and services, income flows, and transfers like remittances.
    
  • The capital and financial account, which records investment into and out of India, such as foreign investors buying Indian shares or bonds.
    If the current account has a deficit (imports and other outflows are bigger than exports and inflows), India needs money from the capital and financial account to balance the books.

• Hedging: This is a simple risk-cover method. An importer or exporter locks-in a future exchange rate using contracts so that a later fall or rise in the rupee does not hurt them. Hedging reduces panic in periods of sharp movements.
  
• Import cover: This tells us how many months of imports can be paid using foreign exchange reserves. Higher import cover means more safety.
  

Where the rupee stands against the dollar and others

• During the last two to three years:
  • Around the end of 2023 the rupee moved near eighty-three to eighty-four per dollar.
    
  • Through 2024 the rupee drifted weaker and settled near eighty-five and a half by year-end.
    
  • In 2025 the rate has touched fresh lows near eighty-nine, with a fall of a few percent so far this year. Many other Asian currencies also weakened during phases when the dollar became strong. Japan’s yen even hit levels not seen for decades despite active support from its authorities. This shows India is not alone in facing dollar strength.
    

What has happened to the rupee over 10 years?

Over the last ten years the rupee has gradually depreciated in nominal terms, moving from the low-sixties per dollar in the middle of the previous decade to the high-eighties now. 

• In nominal terms (the plain market quote), the rupee has slowly weakened: from the low-₹60s per US$ around the mid-2010s to the high-₹80s per US$ now.
  
• This gradual slide is common in many developing economies.
  

Why does this slow depreciation happen?

1. Inflation gap:
   • If India’s prices rise faster than prices in rich countries for a few years, Indian goods become relatively costlier.
     
   • A slightly weaker rupee then offsets that higher domestic inflation and restores price competitiveness in global markets.

2. Dollar cycles:
   • The US dollar itself becomes stronger or weaker over time (interest rates, safe-haven flows, growth outlook).
     
   • When the dollar strengthens globally, most currencies—not just the rupee—look weaker against it.
     

Looking beyond the dollar: basket and “real” view

• Instead of only USD/INR, economists check the rupee against a basket of many trading-partner currencies and also adjust for inflation.
  
• This gives the Real Effective Exchange Rate (REER).
  
  • REER > 100 ≈ rupee a bit overvalued (strong) after inflation adjustment.
    
  • REER near 100 ≈ fair value.
    
• Over recent years, India’s REER has moved around—sometimes a bit strong, sometimes closer to fair—showing a more balanced picture than the USD quote alone.
  

• A small fall in the rupee vs the dollar does not automatically mean a crisis.
  
• Often, it simply catches up with inflation differences and prevents Indian exports from becoming too expensive.
  
• Think of it as price tuning: if domestic costs rise faster, a modest currency adjustment helps keep factories, services, and jobs competitive.
  

Why currencies rise or fall — the basic forces that are moving the rupee now

Think of two big sets of forces: global winds that affect many countries together, and domestic engines that are unique to India. The rupee moves according to the mix of the two.

Global winds

1. Interest-rate gaps: When interest rates in the United States are higher than in most places, money tends to flow toward dollar assets. Investors can earn more there with lower risk. This supports the dollar and weighs on currencies like the rupee. When markets expect the United States to cut rates, the effect can reverse for a while.
   
2. Risk and policy shocks: Tariffs, trade tensions, or changes to work visas reduce confidence in future export earnings, especially in services. That pushes demand for dollars higher. Headlines about new fees for work visas or new trade barriers can therefore move the rupee even before the actual economic impact shows up.
   
3. Regional currency moves: If other Asian currencies fall sharply, traders sometimes sell the rupee along with them even when Indian conditions are stable. These are contagion episodes. Later the rupee often reconverges to its own fundamentals.
   

Domestic engines

1. Oil and import costs: India imports most of its crude oil. A stronger dollar and higher oil prices together raise the import bill and push up demand for dollars.
   
2. Current account balance: When India imports more than it exports (after including services like information technology and remittances from Indians working abroad), there is a current account deficit. That deficit must be financed by capital inflows such as investment into Indian shares and bonds or long-term loans. If such inflows slow, the rupee faces pressure.
   
3. Foreign investment flows: When foreign investors sell Indian shares or bonds and take money out, they convert rupees to dollars, which weakens the rupee. When they buy, it strengthens the rupee. In parts of 2025 global investors turned cautious on many markets, including India, which added to pressure.
   
4. Reserve Bank of India actions: India runs a managed float. The central bank uses foreign exchange reserves and forward contracts to reduce excessive volatility. It does not try to hold a hard line. Letting the rupee move in an orderly way avoids wasting reserves and keeps long-term competitiveness intact.
   
5. Inflation and the real effective exchange rate: If prices in India rise faster than prices in trading partners, Indian goods become less competitive. A small nominal depreciation of the rupee can offset this loss and help exporters regain pricing power.
   

What the present fall means in daily life — who gains, who loses

• Exporters of goods: A weaker rupee can help price Indian products more keenly abroad, so sectors like textiles, leather, toys and some engineering goods may gain for a while. The benefit is smaller when the exporter imports a lot of inputs, because those inputs become costlier.
  
• Information technology and global services: Revenue is often in dollars, so translation into rupees tends to rise when the rupee weakens. But new visa hurdles or slower global growth can reduce demand, so not all currency gains show up in the bottom line.
  
• Importers and households: Fuel, fertilisers, electronics, and many capital goods become costlier in rupees. If the government does not adjust taxes or if world prices are also rising, some of this feeds into inflation.
  
• Students and travellers abroad: Education fees and living costs abroad rise in rupee terms.
  
• Government and the central bank: The rupee cost of servicing any external debt rises (though India’s sovereign external debt is modest). The central bank must balance the risk of higher imported inflation with the need for growth, while keeping the exchange market calm.
  

The best way ahead 

Keep safety buffers strong

• Hold adequate foreign exchange reserves and keep the current account deficit moderate by diversifying exports and holding on to the services surplus. Strong buffers lower panic when the world turns rough.
  

Build competitiveness in the real economy

• Make it easier to produce and export in India: quicker customs, faster refunds, efficient ports and railways, and reliable power.
  
• Grow beyond information technology services into design, research support, health services, legal services and global capability centres, so that India’s invisible earnings remain strong.
  

Deepen the domestic bond market and encourage hedging

• Invite more long-term global investors into rupee bonds under clear rules; promote long-term loans in rupees to reduce “dollar loans” that can become risky when the rupee falls.
  
• Make hedging simple and cheap for small exporters and importers through standard products, digital platforms and pooled schemes so that sudden moves do not force businesses into losses.
  

Let the exchange rate absorb shocks; shield people from inflation

• The Reserve Bank of India should keep focusing on reducing volatility rather than defending a line.
  
• The government can use temporary tax buffers on fuel or targeted support for public transport when imported inflation rises, while protecting capital spending that creates jobs.
  

Reduce the economy’s dollar hunger

• Speed up the energy transition with more solar, wind, storage and modern grids to cut oil imports over time.
  
• Localise part of the supply chain for electronics and key machinery where it is efficient to do so, so that each unit of growth needs fewer imported inputs.
  
• Expand trade invoicing in rupees where partners agree, but do it gradually and voluntarily to keep trust in the system.
  

Communication and data transparency

• Publish easy-to-read dashboards on reserves, import cover, and short-term foreign debt. Clear information calms markets and prevents rumours.
  

Exam hook

Key take-aways

• The rupee has touched new lows near eighty-nine per dollar mainly due to a strong dollar cycle, policy shocks that dent sentiment, and normal balancing of India’s external accounts.
  
• The basket view and the inflation-adjusted view matter: when domestic prices rise faster than foreign prices, a modest depreciation can restore competitiveness.
  
• A weaker rupee helps many exporters but raises import costs; the State should contain the pass-through to inflation, not the exchange rate itself.
  
• India’s foreign exchange reserves around seven hundred billion dollars provide a safety cushion; use them to slow disorder, not to hold an artificial line.
  
• The best defence is stronger fundamentals: export depth, efficient logistics, low and stable inflation, wider hedging, deeper bond markets, and lower dependence on imported energy and equipment.
  
• Communication, transparency and simple, predictable rules keep confidence high and reduce over-reactions in currency markets.
  

UPSC Mains question

“India should let the rupee act as a shock absorber, not as a target.”Explain the recent fall and long term depreciation  of the rupee. (250 words)

Prelims question

 Consider the following statements about India’s exchange rate system:

1. The nominal effective exchange rate is a trade-weighted index of the rupee against a basket of partner currencies; the real effective exchange rate adjusts this index for inflation differences.
   
2. India follows a fixed exchange rate where the Reserve Bank of India pegs the rupee to the United States dollar at a pre-announced number.
   
3. The Special Drawing Right of the International Monetary Fund is a reserve asset based on a basket of major currencies and is not legal tender.
   

Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (c)

One-line wrap

Aim for a rupee that is competitive and calm—let markets set the level, let policy build strength, and let buffers protect people when global winds turn rough.