Editorial 2 : Rupee Breaches 90-Mark: Drivers and Implications
Context:
The Indian rupee has crossed the psychologically critical 90-per-dollar mark, highlighting vulnerabilities in India’s external sector despite a strong macroeconomic backdrop.
Introduction:
India’s macroeconomic fundamentals appear robust, with GDP growth at 8.2% in Q2 FY26, inflation below 1%, and softening crude oil prices easing import costs. However, the rupee’s sustained depreciation underscores the interplay of structural challenges in trade, investment, and external market dynamics, amplified by delayed trade agreements, rising imports, and foreign capital outflows. This situation raises concerns about currency stability, export competitiveness, and the broader economic outlook.
Key Issues:
- Rising Trade Deficit:
- Merchandise exports contracted by 1.8% year-on-year in October 2025, with non-oil exports falling 12%, hitting an 11-month low. Key affected sectors include engineering goods, gems and jewellery, chemicals, and ready-made garments.
- Imports surged 16.6%, driven by gold, silver, fertilizers, and machinery. Gold imports tripled to $14.7 billion due to festive demand and speculative buying.
- A widening trade deficit increases demand for foreign currency, putting downward pressure on the rupee.
- Delayed US-India Trade Agreement:
- Prolonged uncertainty over the India-US trade deal has dampened export sentiment and planning.
- Market participants fear that continued delay could exacerbate the trade deficit and further weaken the rupee.
- Foreign Portfolio Investor (FPI) Outflows:
- FPIs have withdrawn Rs 152 lakh crore from domestic equities since January 2025, seeking higher returns in global markets.
- India’s equity market underperformance relative to global peers has made it a convenient source for liquidity withdrawal, intensifying dollar demand.
- RBI’s Soft-Touch Intervention:
- The Reserve Bank of India has largely allowed gradual depreciation, maintaining the rupee at competitive levels to support exports.
- While beneficial to exporters, limited intervention raises risks for importers, reserves, and potential imported inflation.
- Global Factors:
- Gold imports, crude oil price trends, and the US dollar index are major external drivers of rupee volatility.
- Future currency strength will depend on global macro conditions, trade agreements, and investment inflows.
Implications for India:
- Export Competitiveness: Slightly weaker rupee may support exporters but cannot fully offset structural weaknesses in key sectors.
- Imported Inflation: Rising import bills, particularly for gold and industrial machinery, may push up costs.
- FDI & Investor Confidence: Currency volatility combined with trade uncertainty can deter long-term foreign investment.
- Macroeconomic Management: RBI needs to balance export competitiveness with reserve preservation to avoid disorderly currency movements.
Way Forward / Recommendations:
- Expedite Trade Agreements: Immediate conclusion of the India-US trade deal to reduce uncertainty and support exports.
- Enhance FDI Inflows: Improve ease of doing business, infrastructure, tax clarity, and local governance to attract long-term investments.
- Diversify Exports: Promote non-traditional and value-added exports to reduce dependence on key markets like the US.
- Macroprudential Measures: RBI may intervene cautiously to prevent excessive volatility while maintaining export competitiveness.
Conclusion:
The rupee crossing the 90-mark reflects both domestic structural issues, such as rising trade deficits and foreign investment outflows, and global factors, including dollar strength and gold imports. While moderate depreciation can aid exporters, achieving long-term currency stability requires coordinated policy action in trade, investment, and macroeconomic management.