Why in News?

• The Indian Rupee (INR) recently breached the psychological level of ₹91/USD, triggering speculation about a possible slide towards ₹100/USD.
• The rupee depreciation comes amid global trade uncertainties, especially high U.S. tariffs on Indian goods, and has sparked a debate on whether this trend is structurally worrisome or cyclical and manageable.
• Experts present divergent views on the implications for macroeconomic stability, capital flows, exports, and growth.

What’s in Today’s Article?

• Key Drivers of Rupee Depreciation
• Divergent Expert Views
• Impact on Export Competitiveness
• Outlook for the Rupee
• Challenges and Way Forward
• Conclusion

Key Drivers of Rupee Depreciation:

• External factors:
  • S. tariffs (up to 50%) on Indian exports under the Trump administration.
  • Global market volatility and risk-off sentiment.
  • Broad-based depreciation of INR against major global currencies (USD, Euro, Yen, Pound, Swiss Franc, etc.).
• Domestic structural factors:
  • Persistent Current Account Deficit (CAD).
  • Dependence on capital inflows to finance growth.
  • Rising outward remittances under the Liberalised Remittance Scheme (LRS) and demand for gold as a hedge.

Divergent Expert Views:

• View 1 - Key arguments on depreciation as a serious concern:
  • A “leaking rupee” hampers income growth targets.
  • Reduces foreign portfolio investment (FPI) attractiveness due to currency risk.
  • Encourages capital flight via LRS and dollar-linked assets.
  • Shrinks domestic capital availability, increasing the cost of capital.
  • Weakens macroeconomic growth potential in a high-growth phase.
  • On exports: The notion that a weak rupee boosts exports is a myth -
    • Indian exports lack pricing power (unlike Apple/Microsoft).
    • Mostly B2B exports, where buyers negotiate based on rupee cost structures.
    • Major exporter China succeeded on constant currency competitiveness, not depreciation.
• View 2 - Key arguments on depreciation not alarming:
  • Depreciation is externally driven, not due to domestic macro weakness.
  • India’s macroeconomic fundamentals remain strong adequate forex reserves, manageable CAD, robust GDP growth
  • Seen as a temporary aberration, not a structural crisis.
  • Opportunity angle:
    • Indian Government Bonds (IGBs) are effectively 6% cheaper for foreign investors due to currency depreciation.
    • Could attract fresh capital inflows into Indian markets.

Impact on Export Competitiveness:

• Changing export structure: Shift towards value-added exports: engineering goods, specialty chemicals, pharmaceuticals, electronics.
• Problem with depreciation: These sectors have high import intensity in their value chains. A weaker rupee raises input costs, potentially reducing net export competitiveness.

Outlook for the Rupee:

• Short-term pressure: Likely due to tariffs and global uncertainty.
• Medium-term optimism: Expected India–U.S. trade deal by early 2026. Anticipated improvement in capital flows.
• Long-term scenario:
  • Assuming 2–3% annual depreciation, the rupee may stay under pressure but avoid disorderly collapse.
  • Possibility of rupee strengthening below ₹90/USD if external conditions stabilise.

Challenges and Way Ahead:

• Managing CAD: This should be done without excessive capital inflow dependence. Strengthen export competitiveness through productivity gains, not currency depreciation.
• Preventing capital flight amid currency volatility: Promote stable, long-term capital inflows (FDI over volatile FPI).
• Balancing export competitiveness with rising import costs: Diversify export markets and products to reduce tariff vulnerability.
• Maintaining investor confidence: Maintain credible macroeconomic fundamentals - fiscal discipline, inflation control, forex buffer. Accelerate trade negotiations to reduce tariff-related shocks.

Conclusion:

• The rupee’s fall past ₹91/USD reflects a complex interplay of external trade shocks and structural economic constraints rather than an immediate macroeconomic crisis.
• While strong fundamentals provide resilience, over-reliance on depreciation as a growth or export strategy is misplaced.
• For India, sustainable competitiveness, capital stability, and policy credibility—not a weaker currency—will determine long-term economic strength.