Rupee Slip

Syllabus Areas:

GS III - Economy

The Indian rupee slipped past the ₹90 per US dollar mark on December 3, breaching a psychologically significant threshold for the first time. While this sharp fall has raised concerns in financial markets, experts note that underlying economic fundamentals have not drastically changed. Instead, a mix of external pressures and a clear shift in the Reserve Bank of India’s intervention strategy has accelerated the currency’s slide, bringing the issue squarely into the news.

Why the Rupee Breached the ₹90/$ Mark

  • On December 3, the rupee slipped past ₹90 per US dollar, a level seen as “psychologically significant.”
  • Economic fundamentals have not drastically changed, yet a cluster of pressures accelerated the depreciation.
  • The fall is a mix of market forces and the RBI’s deliberate decision to intervene less.

Two Forces Decide the Rupee’s Value

  • Market Dynamics

    Includes:

    • Export earnings (dollars coming in)
    • Import payments (dollars going out)
    • FPI/FDI flows
    • Commodity price movements
  • RBI’s Intervention Strategy
    • The RBI can sell dollars to defend the rupee or step back and allow market forces to operate.
    • Market pressure has been strong, but RBI allowing the rupee to find its level is what pushed it past ₹90.

Market Forces Weakening the Rupee

  • Export Pressures Due to U.S. Tariffs
    • S. President Donald Trump imposed a 50% tariff on Indian goods, making them costlier.
    • This sharply reduced demand:
      • Exports to the U.S. fell 12% in September and 9% in October.
      • Overall exports for October 2025 fell nearly 12% year-on-year.
    • Surprisingly, cumulative exports (Apr–Oct 2025) still rose 5%, showing resilience and diversification.
    • Yet forward indicators are worrying:
      • Manufacturing PMI at a 9-month low
      • New export orders at a 13-month low
    • Signals deeper pain ahead.
  • Surge in Gold and Silver Imports
    • India saw an extraordinary spike in precious metal imports:
      • Gold imports up 200% YoY in October.
      • Silver imports up 528%
    • This was not normal festive demand:
      • Investors, spooked by market volatility, rushed to safe-haven assets.
      • This caused a massive dollar outflow to finance purchases, weakening the rupee further.
  • Massive FPI Outflows
    • FPIs pulled out $17 billion from Indian equity in 2025 (till Dec 3).
    • This is the largest annual outflow in 20+ years, worse than:
      • 2008 global crisis
      • 2022 sell-off
    • When FPIs exit:
      • They dump rupees → buy dollars → take money out.
    • This exerts direct downward pressure on the currency.

Foreign Portfolio Investment (FPI) refers to money invested in a country’s financial assets—such as stocks, bonds, mutual funds, and other market instruments—by investors who are not based in that country.

These investors do not take ownership or control of companies; they only buy financial securities for returns.

Key Features of FPI

  • Short-term, quick-moving capital
  • No control over business decisions
  • High impact on currency
Rupee Slip

Market Forces Alone Don’t Explain the Fall

Economists argue that while:

  • exports fell,
  • imports surged, and
  • FPIs fled,

these explain pressure — but not why the rupee breached a record low.

The RBI’s change in strategy is the decisive trigger.

RBI's Shift in Exchange-Rate Strategy

Earlier Approach (2022–2024): Heavy Intervention

  • RBI actively defended the rupee.
  • Sold:
    • $53 billion (Q2 2022)
    • $38 billion (Q4 2024)
  • It has allowed the rupee to weaken gradually.

Current Approach (2025): Let It Float

  • RBI has significantly reduced intervention.
  • In Q3 2025, during comparable turbulence:
    • Sold only $10.9 billion.
  • This signals a managed float, not hard defence.
  • RBI now allows exchange rates to adjust more naturally, intervening only to smooth volatility.

Why the RBI Is Allowing the Rupee to Slide

A “Shock Absorber” Strategy

  • A weaker rupee can make Indian exports cheaper.
  • Helps cushion the blow from U.S. tariffs.
  • RBI believes gradual depreciation is healthier than defending a fixed level.

Dr. Pronab Sen’s perspective:

  • Controlled depreciation is good for the economy.
  • But:
    • It must be slow, not abrupt.
    • Sudden drops disrupt contracts, pricing, and business planning.

Why Some Economists Are Skeptical

Nominal vs Real Depreciation

  • Economist Zico Dasgupta warns:
    • Just because the rupee weakens nominally, Indian goods do not automatically become cheaper in real terms.
  • Post-COVID India saw:
    • Currency weakening, but domestic inflation staying high.
    • This neutralised the export advantage.

Weak U.S. Demand May Negate the Benefits

  • Even if the rupee weakens:
    • The S. slowdown could erase gains.
  • Thus, depreciation may be:
    • A symptom of deeper structural vulnerabilities, not a cure.

The rupee’s slide reflects both persistent market pressures and the RBI’s strategic shift toward limited intervention. While depreciation may offer short-term adjustment, sustaining stability ultimately depends on addressing India’s deeper structural vulnerabilities in trade, investment flows, and competitiveness.

Prelims Questions:

1. With reference to Foreign Portfolio Investment (FPI) in India, consider the following statements:
  1. FPI investors can acquire controlling ownership in Indian listed companies.
  2. FPI flows are recorded under the Capital Account of the Balance of Payments.
  3. FPI movements can directly influence the exchange rate through demand for foreign currency.
Which of the above statements is/are correct?
  1. 2 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. 1, 2 and 3
2. Consider the following regarding the impact of tariff hikes by a major trading partner like the United States:
  1. Tariffs directly reduce India’s export competitiveness in the concerned market.
  2. A fall in export earnings can contribute to rupee depreciation by reducing foreign currency inflows.
  3. Higher tariffs automatically lead to a fall in India’s overall exports.
How many of the above statements are correct?
  1. Only one
  2. Only two
  3. All three
  4. None
3. With reference to India’s Balance of Payments (BoP), an increase in gold imports during periods of financial uncertainty will most likely lead to which of the following?
  1. Widening of the Current Account Deficit.
  2. Higher demand for dollars in the foreign exchange market.
  3. Improvement in the Capital Account balance due to increased investor confidence.
Which statements are correct?
  1. 1 and 2 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. 1, 2 and 3
4. Regarding the RBI’s intervention strategy in the foreign exchange market, consider the following:
  1. When RBI sells dollars, it increases the domestic liquidity of rupees in the market.
  2. Reduced RBI intervention may allow the exchange rate to reflect underlying market fundamentals more sharply.
  3. Large-scale dollar sales by the RBI typically strengthen the rupee.
Which of the above statements is/are correct?
  1. 2 and 3 only
  2. 1 and 3 only
  3. 2 only
  4. 1, 2 and 3