Thank you dear subscribers, we are overwhelmed with your response.
Your Turn is a unique section from ThePrint featuring points of view from its subscribers. If you are a subscriber, have a point of view, please send it to us. If not, do subscribe here: https://theprint.in/subscribe/
Overview: Why exchange rates are important?
Currencies are essential in international trade and economic stability. Exchange rates establish the value of a country’s currency in relation to another, influencing inflation, trade competitiveness, and foreign investments. For India and other emerging markets, the USD/INR exchange rate is particularly important, as a stronger or weaker rupee impacts import costs, exports, foreign capital inflows, and overall economic growth. Over the past one year, the Indian Rupee (INR) has depreciated against the US Dollar ($) due to global and domestic economic forces. The exchange rates for various periods are shown below:
| Months | INR/$ Exchange Rate |
|---|---|
| Feb-24 | 83.50 |
| Aug-24 | 84 |
| Nov-24 | 84.13 |
| Jan-25 | 86.6 |
| Feb-25 | 86.88 |
Let us dissect the main reasons for this movement and its overall impact.
Factors causing INR Depreciation:
- Interest Rate Differential: The interest rate increase by the US Federal Reserve has made USD-denominated assets (US Treasury Bonds) more desirable to international investors as they are more rewarding with less risk. As a result, emerging economies such as India witness foreign capital outflow, weakening the INR against the USD. For example, in 2023, the US Fed had raised interest rates aggressively from 0.25 percent in March 2022 to 5.5 percent by mid-2023 to manage inflation. This increased the India-US interest rate gap, making US bonds attractive than Indian bonds. Consequently, foreign investors pulled out funds from debt and equities, weakening the rupee from ₹74/USD in early 2022 to ₹83/USD by late 2023.
- Interest rate differentials play an important role in influencing capital flows. If the US rates are increasing at a higher rate than India, then the INR depreciates. Conversely, if the Fed reduces rates when the RBI maintains high rates, then the INR will stabilize or even appreciate.
- Geopolitical Tensions: There have been several global uncertainties’ that have had an impact on currency markets, driving investors to safe haven assets such as the US Dollar (USD) while weakening riskier currencies such as INR. The prolonged Russia-Ukraine war has triggered price volatility of commodities. New export curbs levied by the US on semi-conductor technology to China, and heightened tensions in the Middle East have disrupted the global trade. Consequently, subdued global investor sentiment affect Indian markets, depreciating the rupee.
- Trade Imbalances: India has a trade deficit due to increased import costs and volatile export demand. In January 2025, India’s trade deficit widened to $22.9 billion, up from $21.94 billion in December 2024 and $16.56 billion in January 2024 amidst global economic uncertainties. India posted a current account deficit (CAD) of $9.7 billion in the quarter ended June 2024, higher than $8.9 billion in the corresponding quarter of the previous year. Such trade deficits have led to depreciation of INR.
- Foreign Fund outflows: Foreign institutional investors (FIIs) have played a major role in Indian market through their investment flows. From August 2024 to January 2025, FII’s continued their selling spree, with notable outflows in October 2024 amounting to ₹1.14 lakh crore, driven by worries over global economic conditions and domestic market valuations. Between November 2024 and January 2025, FII’s were seen reacting to geopolitical tensions and shifts in monetary policies, evident through the withdrawal of approximately ₹1.04 lakh crore. In January 2025 alone, FII’s pulled out around ₹78,027 crore from Indian market.
Government Measures to address Rupee Depreciation
In response to rupee’s depreciation, RBI has intervened through several measures last month.
- Foreign Exchange Intervention: The RBI has been actively selling dollars in the forex market to curb volatility and stabilize rupee. During the week ending 14th February 2025, the RBI has sold an estimated $10 to $11 billion in the spot market, supporting the rupee appreciation by 0.7 percent.
- Policy Rate Adjustments: The RBI cut the repo rate by 25 basis points (bps), bringing it down to 6.25 percent from 6.5 percent in February 2025. This move was an outcome of a reduction in retail inflation, which softened to 4.31 percent in January 2025, the five-month low. These rate cuts spur economic activity as they make loans cheaper, thus encouraging investment and consumption.
- Regulatory Reforms: In January 2025, the RBI introduced some regulatory reforms which permit non—resident individuals and entities to open INR accounts with overseas branches of authorized dealer banks to facilitate smoother financial operations and ensure their involvement in Indian markets.
Conclusion: What lies ahead?
Indian rupee’s depreciation is due to global interest rate differentials, geopolitical tensions, trade imbalances and foreign capital outflows. Although the RBI’s intervention can provide a temporary relief to rupee but a possible US fed rate cut in 2025 can ease pressure on rupee. Eventually, strong macro-economic conditions are needed to make INR sustainable. Business and investors have to beware of the exchange rate fluctuations.
These pieces are being published as they have been received – they have not been edited/fact-checked by ThePrint.