By : Bhaskar Jha, Research Analyst, GSDN
Introduction
Imagine being a parent planning foreign education for your children, only to find out that the cost has increased by 15%. The change didn’t happen because of a mere tuition fee hike, but because of the currency that you dealt in, lost value. Now, consider an entrepreneur, who is dealing with importing heavy machinery from Germany, receiving a bill, significantly higher than his estimates, even though the price remained the same. These are not fables, but lived experiences for people living different roles as fathers, manufacturers, etc.
Currency devaluation, or depreciation, if we consider the current context of India, is one of the most significant, yet the least understood economic phenomena. It impacts inflation, jobs, debt and also plays a huge part in deciding and disrupting household budgets. If one understands the rupee devaluation, one can navigate through one of the core tenets of Indian economic history, which impacts it even today.
What does Devaluation mean?
It is significant to start by distinguishing between depreciation and devaluation. Devaluation is a policy act, carried out by either a government or the central bank, in an attempt at reducing the official value of the currency w.r.t to others. India has employed this approach in 1966 and 1991 under critical circumstances. Depreciation on the other hand is the decline in a currency’s exchange value, based on the market forces, influenced by the demand and supply forces and forex market.
India, in the recent few decades, has turned towards a managed float system, under which RBI broadly lets the market forces dictate the rupee’s rate, but intervenes in some circumstances to avoid extreme volatility.
Rupee has been following a depreciating trend for the last three decades. The rate being 45 Indian Rupees to a Dollar, crossed 70 by 2018, 85 by 2024, 90 by 2025, and revolves around 95 and 96 in 2026 currently. This decline highlights the vulnerabilities of the Indian Economy, amidst a powerful US Dollar, and an increasing trade deficit.
Why is Rupee Losing Value?
While we understand the intricacies and the history of Rupee Depreciation, we need to understand the drivers of this strategic weakness, which are rooted in both domestic and global phenomena, which often interact in different ways.
The Trade Deficit Problem:
India has been importing more than it exports. The merchandise trade deficit in December 2024 stood at 21.94 billion Dollars, which had increased to 41.68 billion Dollars by October 2025, because of the fall in the gold imports. This consistent increase in the imports, especially for elements like Gold, Electronics and Crude Oil, creates a demand for US Dollars, which is putting a downward pressure on the Rupee.
Crude Oil Dependency:
India imports more than 80% of its crude oil requirements. This creates a vacuum where a rise in global oil prices, or a fall in the value of rupees, leads to an increase in the import bill. This creates a downward spiral, where the rupee weakening increases the bill for the oil imports, causing the trade deficit to increase, which then weakens the rupee even more.
Capital Outflows:
Foreign portfolio investors move their capital promptly. When the global risk appetite falls, or US interest rates increase, these FPIs pull out of their Indian equities and bonds. Between April 2025 and March 2026, the equity outflow exceeded by more than 1.5 lakh crore Indian rupees, which created a direct demand for dollars and drained the foreign exchange market.
Global Factors:
The value of the US Dollar, which is moderated by the Federal Reserve Rate Decisions, geopolitical circumstances, and trade policy actions, has a critical impact on India. In 2025, the tariff hike on the Indian exports, which reached 50% after the secondary tariffs were levied under the Trump’s administration, shocked many sectors of Indian export sectors like pharmaceuticals, auto components, textiles, etc., increasing the pressure on the rupee even more.
These factors working simultaneously have created a situation where the rupee is losing its value.
The Implications on The Indian Economy
A rupee depreciating is more than just a mere financial statistic, as it impacts the economy in several ways causing a domino effect.
Import Driven Inflation:
India imports more than just crude oil. It also imports edible oil, electronic components, fertilizers, and machinery for its industries. A depreciating rupee would lead to an increase in prices for the producers, which would eventually reflect the consumer’s prices. Even a 5% fall in the rupee value can add up to 10 to 15 basis points to headline inflation.
Afflicting the Energy Costs:
India depends on imported coal for thermal power and steel production creates a link that is comparatively sensitive. As the rupee depreciates, the cost of electricity generation from coal-based projects changes. This statistic affects more than 70% of India’s total electricity generation, which then also impacts the industrial production costs.
External Debt:
India’s total external debt reached 747 billion dollars in September 2025. Since most of this debt is converted into US Dollars, rupee depreciation increases the burden of repayment in terms of domestic currency, which then drastically impacts the government’s finances.
Volatility in the Equity Market:
The currency weakness and outflowing FPI work simultaneously, resulting in a detrimental impact on the equity markets. This phenomenon is common especially in sectors that are import sensitive, like consumer electronics, automobiles, and oil marketing companies.
Who gets Impacted and How?
The decline in currency is not a completely negative phenomenon, as it further redistributes income in several ways.
The community that gets hurt is the common consumers, who have to suffer through the high consumer prices and suffer through the higher consumer prices for fuel, food, and imported goods. The importers, ranging from oil PSUs to smartphone manufacturers, also face troubles. Students pursuing education abroad, or families with medical and travel expenditure in a foreign currency, have to face increased costs.
However, the beneficiaries are situated in the export sector, including IT services, pharmaceuticals, textiles etc. These people earn their revenues in a foreign currency but pay wages in terms of Indian rupees. A weaker rupee can increase their margins as well. Remittances, which has been considered as one of the most stable income sources in India seem to increase. The tourism industry also expands as India becomes a comparatively cheaper destination to travel.
How can the RBI and The Government respond?
One of the significant moves in RBI’s artillery is intervening in the foreign exchange market, which was visible, even in April 2025, where it sold some currency to control excessive depreciation. The central bank also utilizes currency and adjustments to repo rate, to moderate capital flows. As of the early 2026 reports, India had enough cover for the whole year, which provides it a strong buffer to plan for efficient moves forward.
However, there is a limit to how much the RBI can intervene. Scholars have majorly criticised the RBI’s rigid defence of rupee, and preferred gradual depreciation. This is because an orderly weakening of the rupee can lead to increased exports and preserve reserves. The World Bank also follows this approach and talks about appropriate management of depreciation, which can tackle market pressures and boost trade.
The aim is to reduce the import dependency, through the Production Linked Investment Schemes, in order to encourage domestic production, speeding the process of energy transition, which will then reduce the crude oil imports, and find diversification in its trade partnerships, in order to reduce its dependency on the dollar.
Conclusion
The rupee, at the end of the day, acts like a mirror to India’s economic framework. It reflects its trade balance, investor’s confidence, inflation, and competitiveness. A depreciating rupee is neither a disaster, nor a gift. The situation demands analysis and action accordingly through policy changes.
India’s growth in the last three decades has been impeccable. However, the job is to maintain and continue growing, which will require steps, to reduce import reliance, deepen export capability, and maintain economic stability. The rupee’s transition from 45 to 90 Indian Rupees per dollar is not just the market forces working its way. It is a reflection of the policy, structure, and global forces acting in tandem. To navigate through these pressures, understanding them is the first and most concrete step.
