Is the falling rupee a cause for alarm?
News:
Recently, the Indian rupee slid toward the 90-per-dollar mark, sparking nationwide debate as markets grew uneasy. Is this sharp fall a warning for the broader economy, or could a weaker rupee strengthen exports and corporate earnings? The sudden drop raises urgent questions for citizens and businesses across the country today.
Arguments in Favour of Concern About the Falling Indian Rupee
1. Rising External Vulnerabilities
The rupee’s depreciation strains India’s external sector, increasing the cost of essential imports and tightening policy space. As global markets fluctuate, domestic planners must guard stability in energy, fertilisers, and strategic supplies without compromising resilience.
- Example: Costlier crude and fertiliser imports heighten fiscal pressure, widening vulnerabilities and complicating subsidy management.
2. Risk of Imported Inflation
A weaker rupee fuels imported inflation, raising prices of fuel, machinery, and essential commodities. This gradually affects household budgets, compresses manufacturing margins, and pushes inflation expectations beyond ideal comfort zones even under stable global conditions.
- Example: A 5 percent depreciation can nudge CPI higher, tightening family budgets and squeezing industry margins.
3. Pressure on Government Finances
Higher import bills inflate government subsidy costs, particularly in energy and agriculture. As the rupee weakens, fiscal space narrows, forcing difficult trade-offs between development spending, welfare commitments, and infrastructure priorities.
- Example: Fertiliser and LPG subsidies expand sharply when exchange rates weaken, straining annual budget allocations.
4. Business and Trade Uncertainty
Currency volatility troubles import-dependent industries, prompting frequent price changes and greater hedging. Firms relying on foreign components struggle with planning, leading to slower investments and reduced operational certainty during key growth cycles.
- Example: MSMEs using imported machinery face unpredictable cost spikes with every sharp rupee slide.
5. Reduced Investor Confidence
Persistent depreciation signals market unease, encouraging foreign investors to shift toward safer assets. Large outflows deepen the fall, creating cycles that drag domestic equity, bonds, and financing conditions into temporary stress.
- Example: FPI outflows intensify during volatility, reinforcing downward pressure and weakening market sentiment.
6. Long-Term Competitiveness Concerns
Frequent rupee weakness questions India’s productivity trajectory and may signal reliance on depreciation rather than deep structural competitiveness. Recurrent slides complicate reform credibility and hamper global perception of economic discipline.
- Example: Repeated currency dips raise doubts about domestic value creation beyond favourable exchange rates.
Arguments Against Viewing Concern About the Falling Indian Rupee
1. Strong Economic Fundamentals
India’s macroeconomic fundamentals remain robust with strong GDP growth, moderate inflation, and consistent investment activity. Currency movement mostly reflects global cycles rather than intrinsic economic weakness, preserving overall stability.
- Example: Despite depreciation, India’s growth rate surpassed major economies, signalling durable macroeconomic strength.
2. Boost to Export Competitiveness
A weaker rupee enhances price competitiveness, benefiting exporters through higher rupee earnings. Sectors like IT services, pharmaceuticals, and engineering goods gain momentum, strengthening balance sheets and expanding global reach.
- Example: Services exporters profit significantly during depreciation phases, supporting employment and growth momentum.
3. Global Dollar Strength, Not Domestic Weakness
Rupee movement often mirrors dollar strength, driven by global interest-rate shifts rather than domestic fragility, signalling resilience in global turbulence. In comparative terms, India’s currency remains more stable than many emerging markets.
- Example: Several regional currencies depreciated far deeper, showing global cycles—not Indian weakness—drive volatility.
4. Effective RBI Stabilisation
The Reserve Bank of India actively manages volatility through calibrated interventions using reserves, forwards, and strategic liquidity tools. This prevents disorderly movement while allowing natural market adjustments.
- Example: Targeted dollar sales during turbulence effectively cushioned sharp spikes and restored FX stability.
5. Limited Inflation Transmission
India’s consumption basket is less import-intensive, reducing the inflation impact of depreciation. Even with weaker currency cycles, overall CPI remains within RBI’s tolerance band, keeping economic conditions predictable.
Example: CPI reacts only marginally to moderate rupee weakness, thereby effectively limiting household and industrial disruptions.
6. Temporary and Sentiment-Driven Forces
Recent depreciation stems from short-term sentiment shifts such as FPI rebalancing and tariff uncertainty. These pressures typically ease as conditions stabilise, restoring exchange-rate balance without harming long-term fundamentals.
Example: Previous corrections reversed quickly once global liquidity normalised, proving depreciation was temporary historically so.
Conclusion:
The falling rupee demands balanced assessment. While persistent depreciation can pressure inflation, widen the trade deficit, and unsettle investor confidence, currency movement often reflects global monetary conditions rather than domestic weakness. India’s strong forex reserves, improving growth fundamentals, and prudent policy response provide resilience. The priority is maintaining vigilant monitoring and targeted interventions to ensure stability in an increasingly uncertain global financial environment prevailing worldwide.
