Sanjay Malhotra’s tenure as the new Governor of the Reserve Bank of India has begun at a time of global economic uncertainty. The Indian economy is facing a slowdown, surging oil prices, and a weakening rupee-challenges that could have far-reaching consequences.
Finance Minister Nirmala Sitharaman tried to address the slowing domestic economy in the Union Budget 2025-26 by providing salaried individuals some relief on the income tax front in the hope that it will spark a consumption boom, and revive slowing economic growth. But a weakening rupee could throw a spanner in the works.
A depreciating rupee is not just a financial concern-it has significant political and economic implications. When the currency weakens, import costs rise, fuelling inflation. This is especially worrisome for India, a major importer of crude oil, as higher oil prices directly impact inflation.
Over the years, the rupee has steadily weakened against the dollar and, in fact, by as much as 37% since December 31, 2014, when it was trading at 63.04 and touched a record low of 87.95 against the US dollar on February 10. The depreciation has accelerated in recent months-it has fallen 4.7% since January 2024. In fact, some analysts expect it to move near 90 by year end.
But in a break from the past, this volatility has not rung alarm bells in the corridors of policymaking in New Delhi or at the central bank in Mumbai or even amongst analysts and market participants. There have been some high-level discussions, and the rupee’s movement is being tracked closely by the government. The RBI has intervened in the forex market to ensure that the depreciation isn’t very sharp to maintain stability. However, the government has come in for sharp criticism from Opposition parties that have questioned it over the handling of the depreciation.
RBI Governor Malhotra has underlined that the central bank does not target any specific exchange rate level or band for the rupee and is not overtly worried by day-to-day volatility. “Most of the depreciation is driven by the uncertainties which have come about because of the global, and especially, the Trump-related tariff announcements. And, hopefully, that should settle down and help us in the downward movement of inflation," he said at a press conference after the meeting of the RBI’s central board. He underlined that market forces determine the value of the rupee, and the central bank focusses on the value of the rupee in the medium to long term.
At the recent India Today-Business Today Budget Round Table 2025, Finance Minister Nirmala Sitharaman said the fundamentals of the economy remain strong, and the rupee is strong compared to all other currencies. She attributed the depreciation to the stronger US dollar. "It’s not just the situation for the rupee; it’s for every currency against the US dollar. If your currency is fine and fit except for this volatility against the dollar, can it be if your fundamentals are weak? Can it be so if it is a systemic problem?" she said.
Analysts and market participants too, see this slide as par for the course. To be sure, the Indian rupee is not the only currency facing volatility. Other currencies have seen sharper erosions since October 2024 as the US Dollar has strengthened after Donald Trump was elected as the 47th US President on the Make America Great Again promise. The likely inflationary effects of Trump’s trade policies and proposed increase in tariffs on imports from other countries are expected to lead to slower interest rate cuts in the US. Jerome Powell, Chairman of the US Federal Reserve, said in February that the central bank is in “no hurry” to cut rates. “We know that reducing policy restraint too fast or too much could hinder progress on inflation,” he said.
The US Dollar Index, which measures the value of the US dollar against a basket of six major currencies, has gained nearly 5% since January 2024. “One must also realise that this is not so much rupee depreciation as appreciation of the US dollar,” points out Ajay Sahai, Director General and CEO, Federation of Indian Export Organisations. Typically, in such a situation, when the rupee loses value quickly, exporters stand to reap benefits as it makes their products less expensive to foreign buyers.
However, the impact has been limited because currencies of competing countries have fallen more, making the rupee less competitive, he adds.
A study by the FIEO, conducted between September 10, 2024, and January 10, 2025, said the rupee had till then depreciated by 2.4%, while currencies of competing nations had fallen 3% to 7%. The Malaysian Ringgit fell by 3.1%, the Japanese Yen by 7.3%, the Singapore dollar by 4.8%, and the Philippine Peso by 3.8%.
Sahai expects the rupee to depreciate further against the dollar in case a full-fledged tariff war ensues. “The rupee’s fall may continue till March but should settle after that and start to improve,” he says.
What Next
Can the rupee depreciate to 100 to the dollar? For FY26, the RBI has assumed that the rupee will average 87 against the US dollar, which was the level at the time of the Monetary Policy Committee meeting in February.
RBI data shows that the real effective exchange rate (REER) of the rupee soared to 108.14 in November, indicating that the rupee was overvalued by 8.1%. However, it has since recovered to 107.2 in December. The REER is an inflation-adjusted trade-weighted average value of the domestic currency in terms of its trading partners’ currencies and is used by central banks and international institutions as an indicator of external competitiveness. This implies that the currency may need to fall further.
Where exactly is the rupee headed?
On a year-to-date basis, the Indian rupee depreciated 1.25% to 86.62 against the dollar on February 14, 2025. On the other hand, the Russian Ruble and Brazilian Real strengthened nearly 20% and 8%, respectively.
A report by Moody’s Ratings highlighted that the rupee has been one of the weakest performing currencies in the region. “While the rupee has depreciated by only around 5% in the last two years, it has fallen over 20% since January 2020, making it one of the weakest-performing currencies in South and Southeast Asia,” it said.
When the rupee started depreciating late last year and crossed the 84 mark in the beginning of October, it was expected to settle around 86; in fact, many felt it would take a while for the currency to breach the 87 mark. But it crossed that barrier on February 3, after Trump announced fresh tariffs of 25% on Canada and Mexico. There was also an additional 10% levy on Chinese imports to the US. Trump’s tariff policies have spooked most global markets, and the dollar has continued to strengthen.
DBS Bank has maintained its forecast for the rupee to rise to 88.8 by mid-2025 on the US dollar’s haven status from Trump’s tariffs and the US Fed delaying rate cuts to the second half of 2025.
On January 16, Barclays revised its forecast saying it expects the exchange rate to reach 89.5 by the year-end. "We think INR risks are on the downside should the CNY (Chinese Yuan) depreciate more than expected. INR overvaluation, a growing RBI forward book, and broad USD strength, remain factors likely to [make] the INR weaker," said the report.
Anubhuti Sahay, Head of India Economic Research at British multinational bank Standard Chartered Bank, says the firm sees the US dollar’s strength as a dominant theme in 2025. “While the first half can see softness in the US dollar on likely delays in implementation of tariff and trade policies, the USD is expected to strengthen once these policies take firmer shape. Additionally, US exceptionalism and the consequent higher US rates are likely to keep USD on a stronger footing for most of 2025,” she says.
The bank maintains its forecast of INR at 87.75 by December this year. "While increased uncertainty and volatility in dollar can lead to periods of overshooting and undershooting versus our forecasts, we believe if our year-end forecasts are realised, the rupee will be fairly valued," Sahay says.
The impact
In the short term, a weaker rupee is seen improving the country's trade balance. In the longer run, though, a stronger rupee is seen to be more beneficial.
It isn’t just trade that a depreciating rupee impacts, its effect is felt through the economy in several ways—some positive and some adverse. For instance, travellers and students going abroad may have to pay more rupees to buy dollars, imported raw materials would cost more and companies will pass that on to buyers. Consumers may feel the pinch of costlier food items and imported goods. Most worrying is the potential impact on the economy’s competitiveness and the higher import bill, trade balance and forex reserves.
On the other hand, exports could benefit, but Sahai of FIEO notes that most exporters tend to hedge against currency risks. “While the rupee’s depreciation has helped exports to some extent and largely in cases where exporters are not hedging the currency, we must remember that India also imports a large number of items and a fall in the rupee impacts the import bill. Imports of items including petroleum, gems and jewellery and electronics is huge and about 10% of petroleum imports get impacted by the fall in the rupee,” Sahai says.
Rising import costs can also drive inflation, which may put the RBI in a spot, since it lowered the repo rate in the MPC meeting in February, the first one under new Governor Malhotra. If the RBI were to raise the repo again to combat inflation, that would impact borrowing costs for businesses and consumers alike. Sandeep Raina, Executive Vice President–Research of wealth management platform Nuvama Professional Clients Group, says, “A weakening rupee tends to be inflationary, which suggests that interest rates may remain elevated for an extended period.”
Per the RBI’s estimates, a 5% weaker rupee leads to about a 35 basis points increase in headline inflation.
However, economists believe that inflation is unlikely to spike because of a weaker rupee. “The impact this time is likely to be lesser on two counts. First, India’s moderating growth is likely to limit pricing power. Second, if trade war hits China, increased exports from China to rest of the world (excluding the US) are likely to keep global commodity prices under check,” Sahay of Standard Chartered.
Radhika Rao, Executive Director and Senior Economist at Singapore-headquartered DBS Bank, points out that manufacturers are unlikely to immediately and fully pass on costs to customers, considering the cyclical slowdown that the country is grappling with.
"The risk of higher oil prices being transmitted to local fuel prices remains limited, as the authorities are expected to prioritise keeping domestic petrol and diesel prices stable to preserve household purchasing power," Rao says. She highlights the host of measures taken to ease liquidity and says this suggests that there is less focus on maintaining high interest rates purely to defend against currency depreciation.
Stock market analysts believe investors should keep an eye on export-oriented sectors as the rupee is hovering at all-time lows. The local currency has also faced pressure from foreign institutional investors’ persistent selling of Indian equities. Global investors offloaded shares worth more than Rs 1.65 lakh crore in just four months till January 2025.
Anirudh Garg, Partner and Fund Manager at Invasset PMS, says the depreciating rupee can negatively influence market sentiment, particularly foreign investors. “As the rupee falls, foreign investors’ returns may decline in dollar terms, prompting them to shift their investments to other stable or higher-yield markets, which can lead to capital outflows from India.”
Feroze Azeez, Deputy CEO of wealth management firm Anand Rathi Wealth, says the increase in import costs could particularly impact the profit margins of companies in the oil and gas, chemicals, pharmaceuticals, and electronics sectors. “Costlier imports may impact domestic inflation partially. FIIs might also pull out further in fear of currency loss, which can partially impact the market.”
Another outcome of a weaker rupee to consider is the increase in the cost of overseas debt, particularly in instruments like foreign currency convertible bonds (FCCBs), which could affect companies with significant foreign currency exposure. Besides, firms might reconsider plans to raise funds overseas.
India’s external debt reached a record high of $711.8 billion in September 2024, up 4.3% from $682.19 billion in June. The figure was around $455.92 billion a decade ago, according to CMIE Economic Outlook. Data from ACE Equity reveals that at least nine listed companies currently hold outstanding FCCBs totalling $1.8 billion, which are set to mature in 2025.
Policy response
This brings up a critical question: should the RBI intervene to stabilise the rupee, or should it allow market forces to determine its value? The central bank typically intervenes by selling dollars and buying rupees, reducing liquidity in the banking system.
Apart from direct intervention in the forex market, the RBI has also taken other measures to stem the fall. For instance, in January 2025, it liberalised certain regulations under the Foreign Exchange Management Act, 1999, such as allowing non-resident Indians to open Special Non-Resident Rupee Account for current and capital account transactions with Indian residents as well as permitting transfer of funds for all bona fide transactions between repatriable rupee accounts.
The recently concluded MPC, however, did not make any specific announcements regarding the rupee, which also left analysts surprised. “The RBI policy meeting was somewhat underwhelming for the INR, with no measures to encourage capital inflows and the RBI reiterating its standard language on foreign exchange,” noted a report by Nomura.
Policy watchers in New Delhi note that while the Finance Ministry and the Commerce Ministry have been monitoring the depreciation in the rupee, the need for a multi-pronged strategy to arrest its impact has not been felt for now. The key concern remains inflation, which has remained above the RBI’s 4% target. Apart from petroleum products, several food items, including edible oil and pulses, are imported and a weaker rupee could fuel inflation in these items.
Commerce and Industry Minister Piyush Goyal noted that the depreciation of the rupee does not necessarily help the Indian economy. “Depreciation is a bad thing. We believe that in the long run, we must focus on a stronger currency because we are still an import-dependent country,” he said at the India Today-Business Today Budget Round Table 2025.
But too much intervention by the RBI can tighten financial conditions. According to RBI data, the central bank has spent $77 billion in foreign exchange reserves to prevent excessive depreciation. Consequently, India’s forex reserves fell from $701.18 billion on October 4, 2024, to $630.61 billion by January 31, 2025.
However, former RBI Governor and Katherine Dusak Miller Distinguished Service Professor of Finance at Chicago Booth, Raghuram Rajan, has cautioned against excessive intervention. Speaking to BT at Davos, Rajan argued that defending a fixed exchange rate could lead to rapid depletion of forex reserves without delivering long-term benefits. “I don’t think we should hold the rupee at a level that is unsustainable. That just means wasting our foreign exchange reserves, and we will need it at some point if things become more difficult in the global economy. So, I would say do what the RBI has always been doing, which is focus on reducing volatility. But don’t try and determine what the level is.”
Madan Sabnavis, chief economist, Bank of Baroda echoes similar concerns. “The problem is that if you keep selling, how much can you sell, especially if it’s being caused by an external factor like the dollar strengthening. I can keep selling dollars, today it will stabilise. Tomorrow again, it will start falling. How much can the RBI sell?”
At the same time, if the RBI remains passive, markets could interpret this as a signal that the central bank is comfortable with a weaker rupee. “If I’m an exporter, I might delay converting my earnings, expecting a better exchange rate later. If I’m an importer, I’ll rush to buy more dollars, increasing demand and pushing the rupee down further,” Sabnavis explains. “The RBI has to strike a fine balance.”
Rao of DBS Bank says the authorities are likely to step in to limit sharp fluctuations but not to reverse the trend. “The central bank had adopted a strategy of building FX reserves during periods of strong foreign inflows, which saw the stock reach a record high in Q4 2024. At present, reserves remain well-cushioned, ranking favourably against most vulnerability indicators, including import coverage and our proprietary gross external financing ratio,” she says.
Sahay of Standard Chartered also says the bank believes the RBI should allow the rupee to be the shock absorber in case of increased external sector volatility. “The import cover with RBI at about 9.7 months is robust and assuring. We think increased tolerance towards stronger USD along with few measures like FX buy-sell swap are likely to help. If the need arises, a separate window for oil importers can be introduced to manage their USD demand,” she says.
The rupee’s performance will depend on the US economy and its trade policies. Factors such as US Federal Reserve’s policies, global trade conditions, and capital flows will continue to influence its trajectory. That is true for most countries around the world. With Trump in office for nearly two months now and providing a glimpse of his policy agenda, no one is sure if the worst is behind us or if it is just the beginning of a new era of volatility.
Though the RBI aims to curb excessive fluctuations, it may have to allow the rupee to adjust gradually in line with global market conditions. The coming months will test the central bank’s ability to navigate these competing pressures.
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