The Indian rupee’s exchange rate against the US dollar has undergone a drastic transformation over the decades, moving from less than ₹4 per dollar in 1947 to over ₹85 per dollar in 2025. This depreciation reflects deeper economic factors, including inflation, purchasing power disparities, and policy challenges. While exchange rate volatility may arise due to short-term events like geopolitical tensions or global trade fluctuations, the long-term depreciation stems from consistent differences in inflation rates between India and the United States.
Inflation is a major factor that determines the value of a currency. Over time, India’s inflation rates have historically been higher than those in the US, leading to a steady decline in the rupee’s relative value. Inflation reduces the purchasing power of money, meaning that the same currency buys fewer goods and services. While inflation occurs in all economies, India’s higher average inflation has accelerated the rupee’s depreciation relative to the dollar. In addition, while many random factors influence short-term exchange rates, inflation stands out as a defining factor for long-term currency trends.
How Can India Address the Rupee’s Depreciation?
One of the most effective ways to slow the rupee’s decline would be to lower India’s inflation target. India’s inflation target currently stands at 4%, a figure established in 2016 as part of a broader framework for inflation control. However, the US Federal Reserve aims for an inflation target of 2%, and the disparity between these rates contributes significantly to the rupee’s depreciation. To reduce this gap and stabilize the rupee over time, policymakers could revise India’s inflation target to 3% or even 2%, aligning it more closely with advanced economies.
Reducing the inflation target would require significant policy adjustments. The Reserve Bank of India (RBI), for example, would need to adopt stricter measures to control the money supply. This would lower inflation in the long term but might also reduce the RBI’s dividend income—the revenue earned from issuing money—which the Ministry of Finance (MoF) depends on to fund various programs. To address this gap, the government could pursue alternative revenue sources or modest cuts in public spending. These fiscal adjustments, while challenging, are necessary to bring the rupee’s depreciation under control.
The RBI must also take its inflation-targeting mandate more seriously. Over the last five years, efforts to consistently control inflation have faltered, partly due to rising food prices. While food price inflation is influenced by supply shocks beyond the RBI’s control, targeted measures like increasing free trade in food commodities, improving supply chain efficiency, and implementing tax-subsidy policies could ease the burden. Such coordinated action would make inflation management more effective and further support the rupee’s stability.
What Role Does Export Competitiveness Play in the Rupee’s Value?
Another factor influencing the rupee’s exchange rate is India’s export competitiveness. The exchange rate reflects the relative price of goods and services in one country versus another. If Indian goods and services are perceived as less competitive, the rupee faces additional downward pressure. Several factors, such as high production costs, inefficient supply chains, and rigid regulatory frameworks, have diminished India’s competitiveness in global markets.
A crucial measure of export competitiveness is the Real Effective Exchange Rate (REER). This metric considers inflation-adjusted currency values and provides a snapshot of whether a country’s currency is overvalued or undervalued compared to its trade partners. Rather than targeting a specific REER, policymakers should prioritize reforms that enhance ease of doing business, streamline labor laws, and promote innovation. These reforms would improve domestic productivity and allow the market-determined REER to reflect India’s growing potential in international trade.
Policymakers, particularly the Ministry of Commerce and Industry, play a critical role in boosting competitiveness by promoting a business-friendly environment. From improving infrastructure to encouraging private investments in technology and innovation, these steps would create sustainable opportunities for growth and help the rupee maintain a stable trajectory in the international financial landscape.
Should the RBI Intervene in the Currency Market?
The role of the RBI in managing the rupee’s exchange rate should be strategic and measured. Excessive interventions, such as frequent purchases or sales of foreign exchange reserves, can erode credibility and disrupt market equilibrium. Instead, the RBI should intervene only during periods of extreme volatility or speculative attacks on the rupee. This approach aligns with the principle of flexible inflation targeting and enhances the transparency of monetary policy.
The RBI can also focus on reducing external vulnerabilities by maintaining adequate foreign exchange reserves to stabilize the rupee in case of global disruptions. Alongside this, the government can adopt targeted measures, such as a variable tax-subsidy scheme to stabilize the domestic prices of vital commodities like oil. By stabilizing oil prices, which significantly impact cost-push inflation, the government can indirectly shield the economy from exchange rate pressures and minimize the spillover effects on consumer goods.
What Are the Broader Implications of Depreciation?
The depreciation of the rupee carries widespread implications for the Indian economy. For import-dependent sectors like technology and energy, a weaker rupee leads to higher input costs and raises prices for end consumers. For example, a 1% decline in the rupee’s value can result in a 2–3% increase in the cost of oil imports, creating inflationary pressures across multiple sectors. While currency depreciation can boost the competitiveness of India’s exports by making them cheaper for foreign buyers, this benefit is often undermined by inefficiencies in production and logistics.
Depreciation also impacts the standard of living, especially for the less privileged. High inflation caused by a weaker rupee disproportionately burdens low-income households, who spend a larger portion of their income on essential goods. Addressing inflation would help improve their purchasing power and reduce economic disparities.
Can the Rupee’s Depreciation Be Slowed?
Slowing the rupee’s depreciation is possible with a coordinated policy effort involving multiple stakeholders. Tighter control over inflation, enhanced export competitiveness, and prudent fiscal management would help ensure that the rupee’s value stabilizes over time. The government and RBI must also collaborate to address structural inefficiencies that exacerbate the rupee’s depreciation.
Although it may not be feasible to completely stop the rupee’s depreciation, especially given global economic trends, India can manage the pace of depreciation to reduce its impact. A focused strategy combining monetary discipline, economic reforms, and improved global competitiveness will ensure that the rupee maintains a stable and sustainable value in the future. These efforts, though challenging, are crucial for securing long-term economic growth and resilience for India.