TThe sudden fall within the worth of the rupee has considerably spooked folks and the market. They marvel why that is occurring when the economic system is doing properly, with good progress charges, low inflation, and a average present account deficit.
India’s progress fee this 12 months is estimated at 7.4%. Inflation is beneath management, with the CPI inflation fee on the finish of 2025 at 1.33%, beneath the Reserve Financial institution of India’s (RBI) decrease goal vary for the fourth consecutive month. The present account deficit to GDP ratio for the primary half of 2025-2026 was simply 0.76, in contrast with 1.35 the earlier 12 months. The speed of decline within the worth of the rupee since April 2025 has been roughly 6%.
The villain of this work
The primary villain of this concern is capital outflows, because the commerce deficit (items and providers) will not be a lot bigger at $96.58 billion in April-December 2025 in comparison with $88.43 billion in the identical interval final 12 months. Capital outflows have continued since US President Donald Trump took a detrimental view of India and imposed 50% import duties on Indian exports. Initially, the US imposed a 25% tariff on a “reciprocal” foundation, however then imposed an extra 25% on the grounds that India was importing crude oil from Russia. It’s now threatening to impose 25% tariffs on international locations doing enterprise with Iran. This consists of India, however commerce with Iran accounts for less than 0.15% of the nation’s complete commerce.
Web capital inflows for the April-December 2024 interval have been $10.615 billion. In the identical interval in 2025, the online outflow was $3.9 billion, turning detrimental. Regardless of months of negotiations with the USA, no settlement has but been reached. It appears that evidently there are some issues that can not be simply solved. If this stalemate continues, the rupee will depreciate additional.
Within the altering state of affairs, it needs to be famous that capital outflows are usually not brought on by strictly financial elements, however by worry brought on by the “hostile” angle of the USA. In 2022, the rupee depreciated by nearly 10%. There have been financial explanations for this, such because the Federal Reserve’s sudden rate of interest hike. However this time, there is no such thing as a clear financial rationalization. On this approach, the state of affairs shifted from an financial area to a diplomatic area. When tariffs are weaponized for geopolitical causes, diplomacy is the first path to decision.
RBI intervention
India’s alternate fee regime was modified in 1993, shifting to a market-determined alternate fee regime. Nevertheless, the brand new regime didn’t preclude the Reserve Financial institution of India from intervening within the international alternate market. Since 1993, each central financial institution governor has made it clear that the aim of intervention is to not repair the worth of the rupee, however to cut back its volatility.
Nevertheless, the phrase “volatility” was not outlined. It may be inferred from the RBI’s transfer that decreasing volatility not solely means decreasing fluctuations round prevailing ranges, but in addition ‘mitigating’ a fall within the worth of the rupee when it happens. The shock from rupee fluctuations comes at a value. Interventions are undertaken solely to attenuate the consequences of such sudden shocks. Nonetheless, the intent of the dot is to not stop a fall, however to glide easily to the extent of the autumn. It might be finest for the RBI to make clear that decreasing volatility additionally consists of moderating the autumn within the worth of the rupee. In any case, an intervention, particularly whether it is uneven, impacts the extent of the alternate fee whereas minimizing alternate fee volatility. The present state of affairs has added one other factor of non-economic pressures performing on the worth of the rupee. In truth, if India and the US attain an understanding, the rupee will respect.
Why devaluation will not be the answer
Will the autumn within the worth of the rupee have any useful impression?The share of imports in India’s exports is growing. Consequently, the stimulus to exports offered by devaluation will probably be eased within the modified circumstances. Furthermore, given the excessive tariffs within the US market, it’s unlikely that Indian exporters will achieve important entry within the US market. By way of imports, most of India’s imports are day by day requirements, with crude oil alone accounting for about 25% of complete product imports. If the rupee depreciates, costs will rise and inflation will speed up.
Inflation in India is not any increased than that in developed Western international locations. If the inflation hole is massive, forex devaluation is required. Then you want to have a look at the actual efficient alternate fee (the weighted common of a rustic’s forex, adjusted for inflation, in opposition to a basket of main buying and selling companions). It’s true that some international locations, reminiscent of China, have tried to have their currencies undervalued. Nevertheless, that is forex manipulation and is debatable.
The autumn within the worth of the rupee over the previous month was pushed by considerations brought on by the US imposing 50% tariffs on Indian exports. New U.S. laws may additional enhance tariffs. The complete impression of the tariffs won’t be felt till 2026-2027.
What’s at the moment hitting the rupee is capital outflows. These leaks will proceed till India and the US attain an settlement. The autumn within the worth of the rupee can’t be ignored. Each fall within the worth of the rupee will speed up capital outflows. In such a state of affairs, the required return in rupee phrases will rise to draw traders. Capital outflows brought on by the sale of shares have a direct impression on the inventory market. Whereas US commerce negotiators want to achieve an settlement with the US quickly, the RBI can solely cushion the autumn within the worth of the rupee.
C. Rangarajan, former Governor, Reserve Financial institution of India. Mr. NR Bhanumurthy, Director, Madras Faculty of Economics, Chennai
issued – January 28, 2026 1:18am IST
