The Deterioration and Depreciation of the Rupee

SATISH SINGH

On March 20, the Indian rupee fell sharply against the US dollar, hitting a low of 93.24 before bouncing back to 93.12. This depreciation can be attributed primarily to two key factors: the escalating import costs for crude oil and the ongoing outflow of investments from Indian financial markets by foreign investors. At the start of March, the rupee traded around 92, signalling a troubling trend for the Indian currency. To provide some historical context, in 1947, one US dollar was equivalent to just 4 rupees; by 2022, this figure had surged to 80 rupees, and it has now further deteriorated to 93 rupees. This represents a troubling depreciation of 13 rupees in a mere three-year span.

One of the overarching causes of the rupee's instability is the ongoing geopolitical tensions, particularly the conflict between the United States and Iran, which has driven a prolonged rise in global crude oil prices. Following a series of Iranian attacks in the Gulf region, the price of Brent crude has escalated past the critical threshold of $110 per barrel. Given that India relies heavily on imported crude oil, approximately 85% of its total consumption, the current geopolitical climate exacerbates the country's economic challenges. Notably, oil transactions must be conducted in US dollars, which means rising oil prices have triggered heightened demand for dollars. This increased demand is consequently placing substantial pressure on India's foreign exchange reserves.

As of March 22, 2026, India’s foreign exchange reserves were approximately $709.76 billion. The escalating crude oil prices are compelling Indian importers to expend more dollars, further intensified by the Reserve Bank of India's active measures to sell dollars into the market to stabilise the rupee amidst prevailing global tensions and soaring oil prices. For instance, during the week ending March 13, 2026, India’s foreign exchange reserves declined by $7.052 billion. Before this drop, the week ending March 6, 2026, had already recorded a staggering $11.68 billion reduction. It’s also worth noting that in mid-February 2026, India's foreign exchange reserves reached an all-time high of over $725 billion.

In addition to these challenges, the prevailing global uncertainty has prompted Foreign Portfolio Investors (FPIs) to withdraw significant capital from the Indian stock market, with estimates indicating that around $8 billion, or approximately ?83,000 crore, has been pulled out by March. The depreciation of the rupee has heightened caution among foreign investors, prompting them to reallocate their portfolios away from riskier emerging markets like India toward relatively safer US Treasury bonds. This outflow of capital further exacerbates downward pressure on the rupee, contributing to broader economic unease in the market.

The Strait of Hormuz serves as a crucial maritime corridor, facilitating the transportation of approximately 20% of the world's oil supplies. This route is particularly significant for India, as nearly half of the nation’s oil requirements are met through imports that traverse this vital passage. However, escalating tensions between Iran and Israel present a continuous risk of supply disruptions, which could have far-reaching implications for global oil prices and availability. Experts indicate that as long as the geopolitical situation surrounding this key maritime route remains unstable, the Indian Rupee is likely to remain volatile.

In response to these challenges, the Reserve Bank of India (RBI) has been proactively intervening in the foreign exchange market to stabilise the Rupee amidst these turbulent conditions. The RBI's strategy includes selling US dollars from its foreign exchange reserves to mitigate the Rupee’s decline against major currencies.

The depreciation of the Rupee has multiple adverse consequences for the Indian economy. A weaker Rupee increases the cost of imports, especially essential commodities like crude oil and electronic goods such as mobile phones and laptops. As import costs rise, India's Current Account Deficit, which measures the difference between the nation's total imports and exports, is expected to widen, further straining the economy. Companies that have sourced debt from international markets will also find their repayment obligations becoming more expensive, increasing the overall debt burden.

Moreover, a weaker Rupee negatively impacts the cost of overseas education for Indian students, potentially leading to a decline in the number of students pursuing studies abroad. Persistently rising crude oil prices can stoke inflation rates, exacerbating economic challenges. The RBI may find it increasingly difficult to lower policy interest rates, which could slow growth as borrowing costs rise. This cycle can lead to reduced economic activity and create additional inflationary pressures, hampering recovery efforts.

Interestingly, the depreciation of the Rupee does present certain advantages. Exporters stand to gain, particularly those in sectors like information technology, pharmaceuticals, and textiles, as they receive payments in US dollars for their products or services. When these companies convert their earnings back into Rupees, the transaction yields a larger local-currency amount due to the favourable exchange rate. Furthermore, India is becoming an attractive destination for international tourists, as a weaker Rupee results in lower costs for visitors, potentially bolstering the country’s domestic tourism industry. Additionally, remittances sent home by Indians working abroad translate into a higher value in Rupees for their families, providing financial relief and support.

However, experts caution that unless global crude oil prices stabilise and the sell-off by foreign investors diminishes, the Rupee is likely to remain weak. Predictions suggest that if the current global situation does not improve, the Rupee could even fall below 94 against the US dollar.

The value of any nation’s currency is predominantly influenced by the dynamics of supply and demand in the international market. For example, if India increases its import volume, especially concerning crude oil, it requires a larger supply of US dollars to facilitate these transactions. An uptick in demand for dollars raises its value, which in turn weakens the Rupee.

Additionally, a currency's valuation is affected by various economic factors, including the country’s inflation rate, interest rates, and the confidence levels of foreign investors. Low inflation generally encourages economic growth, while a stable economic environment fosters a sense of security among investors, leading to increased dollar inflows and subsequently strengthening the Rupee. In essence, a currency’s value is directly proportional to its demand relative to its supply in the global marketplace.

In summary, while a weaker Rupee may offer some benefits, the disadvantages appear to outweigh these benefits. Presently, India is confronted with an elevated inflation risk, exacerbated by challenges related to cooking gas supplies and rising petrol and diesel prices. Global economic uncertainties, coupled with soaring inflation, are expected to hinder growth. Economic stability is at stake as foreign exchange reserves dwindle, the challenges of importing crude oil become more pronounced, foreign investor hesitancy continues, and the overall value of the Rupee is likely to decline further.

(The author serves as a Senior Banking and Economic Columnist. The opinions expressed in this article reflect his personal views. He may be contacted via email at satish5249@gmail.com)