The Indian Rupee (INR) has been under pressure over the last year, facing both global and domestic economic challenges. The rupee has been hit by the US Fed’s policy moves, rising crude oil prices and domestic inflation, depreciating sharply.
A selloff in Indian assets has led this month to the rupee’s biggest drop in two years. It fell 0.6% to a record low of 86.6 against the US dollar on January 13. Domestically, inflation has also put pressure on the rupee by reducing purchasing power.
With the new RBI Governor at the helm, reduced intervention by the Reserve Bank of India (RBI) has added to the pressure.
Reduced RBI intervention weakens INR
One of the primary reasons for the recent, sharp decline is the Reserve Bank of India’s (RBI) policy shift under its new governor. The RBI, under new governor Sanjay Malhotra, has opted to let the rupee move more freely, and has limited aggressive actions to stabilize the currency. This is a shift from the previous approach by ex–Governor Shaktikanta Das, who kept tight control over the rupee, only allowing gradual changes in its value.
Shaktikanta Das served as the RBI Governor from December 2018, managing crises like the pandemic, geopolitical tensions, and instability in the non-banking financial sector. The RBI, under his governance, worked to mitigate rupee volatility. To defend the rupee, the RBI intervened aggressively, utilizing over $60 billion of its foreign exchange reserves in November. The RBI also used dollar-rupee swaps to manage rupee liquidity without affecting the exchange rate.
However, experts including former RBI Deputy Governor Viral Acharya, have emphasized the importance of allowing some currency volatility to encourage private hedging, as the central bank cannot absorb all risks.
The IMF also highlighted that excessive interventions have limited rupee movement, and reclassified India’s exchange rate regime as a ‘stabilized arrangement’ from ‘floating.’ Exporters were also impacted by the central bank’s policy of not allowing the rupee to find its natural level versus the dollar.
Indian Rupee hits record lows, could fall further
The INR moved from being one of Asia’s best-performing currencies in 2023 and 2024, to a significant underperformer in the past quarter. Throughout 2024, the rupee depreciated by 2.8%, starting the year at Rs 83.2 and weakening to Rs 85.6 by December. It is down over 1% so far this year.
Over the last three years, the INR has gradually weakened against the dollar. In January 2022, the exchange rate stood at approximately Rs 74.5 per USD. By January 2025, the INR had depreciated by nearly 16.2% over this period. Several factors contributed to this decline, including the USD’s strength driven by global economic changes, India’s slowing economic growth, and a widening trade deficit. As a major crude oil importer, fluctuations in global oil prices have also hit India’s import costs and the rupee’s value.
Rupee’s depreciation comes with significant consequences
When the rupee depreciates, the cost of importing goods rises, leading to higher prices for imported products and raw materials. This increase in import costs can contribute to overall inflation, affecting consumers and businesses alike.
Rising inflation due to a weaker rupee can influence RBI’s monetary policy decisions. The RBI might raise interest rates to control inflation, which makes borrowing costlier and could slow down economic growth. On the other hand, if inflation seems under control, the RBI might decide not to change rates. With the rupee's recent drop in value, there’s speculation that planned interest rate cuts might be postponed.
A weaker rupee can make Indian exports more competitive by reducing their prices in international markets. This price advantage can boost demand for Indian goods abroad, potentially increasing export volumes. However, the benefits may be limited if key export sectors rely heavily on imported raw materials, as the cost of these imports would also rise with a depreciating rupee, offsetting the advantages gained from lower export prices.
