By Categories: Economy

Context :- The rupee seems to be on a trajectory of decline, with its value relative to the dollar (as per the Reserve Bank of India’s reference rate) falling from Rs.76.4 at the beginning of April to Rs.79.1 at the beginning of July.


  1. India’s trade deficit has increased in recent months as export growth remained sluggish and imports registered a sharp increase (In June, with exports estimated at $38 billion and imports at $63.6 billion, the trade deficit rose to a new high of $25.6 billion)
  2. Foreign portfolio investors are pulling out of Indian equity and debt markets.
  3. High inflation across the world resulted in significant increases in policy interest rates by the US Federal Reserve and other developed country central banks, thus investors are booking profits that accrued over a two-year boom in Indian markets and exiting the country now.
  4. Spike in oil prices following the Ukraine invasion, which has inflated the import bill, and restrictions on exports for India.

However, there is another observation:-

  1. Even as the rupee has depreciated vis-à-vis the dollar, it has actually strengthened against other hard currencies such as the euro and the yen

Thus, Duvvuri Subbarao, a former RBI Governor advocates:-

  1. The RBI should lean towards non-intervention rather than intervention, and allow the rupee to gradually depreciate.
  2. And it should not be a cause of worry as forex reserve is around $600 billion.

Nonetheless, there are some causes to be worried about:-

  1. High import bill is not on account of higher oil prices alone but also because of increased imports of commodities varying from gold to coal.
  2. Coal Crisis:- Coal imports were unavoidable because stocks with the thermal power plants had touched unsustainable lows, raising concerns about large-scale power outages
  3. India’s coal crisis is the result of the failure of policies aimed at restraining the public sector’s role in coal production and getting the private sector to step in.
  4.  While the objective of curbing public sector growth worked, the drive to get the private sector to fill the gap was a failure


In recent years there were three episodes of sharp rupee depreciation: in August 2019, March 2020, and over May-June 2022. In all three instances, a common and important driver of the depreciation was the outflow of capital.

Seen from this angle, the recent and rapid depreciation of the rupee vis-à-vis the dollar does give cause for concern. The drivers of the depreciation are not all short term. The trade deficit threatens to remain high for quite some time. And the excess inflow of capital that propped up the rupee even when deficits widened has all but dried up.


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