The Falling Indian Rupee: Why It Matters, How It Impacts the Economy & Financial Markets

With the Indian Rupee touching its lowest ever point today ₹90/$, it has become in evident that there is a lot going on in terms of external pressures that has a become a driving force for our country’s economic future. The Indian rupee is not just a currency; it is a reflection of the country’seconomic strength, external trade balance, global investor confidence, inflation outlook, and financial stability. While gradual depreciation is normal for a developing economy like India,persistent or sharp rupee weakness can create wide-ranging ripple effects across the economy and financial markets.

We have witnesses that in recent times, the rupee has faced consistent pressure due to a strong US dollar, volatile crude oil prices, global interest rate tightening, and shifting capital flows. So here is our understanding as towhy the rupee falls, how it affects every layer of the economy, and what its future implications areis critical for investors, businesses, policymakers, and households.

1. What Does Rupee Depreciation Actually Mean?

Rupee depreciation simply means:More rupees are required to buy one US dollar.

For example:

• At ₹75 per dollar, $1 = ₹75
• At ₹90 per dollar, $1 = ₹90

This may look like a small numerical change, but in economic terms, it represents aloss of over 10% in India’s international purchasing power. Since global trade, energy, and financial flows are largely dollar-denominated, this change has deep consequences.

2. Why Does the Indian Rupee Depreciate?

The rupee weakens due to a mix ofglobal forces and domestic structural factors:

a) Strong US Dollar & High US Interest Rates

When the US Federal Reserve raises interest rates, global money moves into US bonds and assets, strengthening the dollar and weakening emerging market currencies like the rupee.

b) Crude Oil Dependence

India imports over85% of its crude oil requirement. When oil prices rise globally, India’s dollar demand increases sharply, putting pressure on the rupee.

c) Trade & Current Account Deficit

India’s imports traditionally exceed its exports. This structural trade gap createspermanent dollar demand, weakening the rupee over time.

d) Foreign Capital Outflows

When Foreign Institutional Investors (FIIs) pull money from Indian stocks and bonds, demand for dollars rises, weakening the rupee.

e) Global Risk Events

Wars, global recessions, banking crises, and geopolitical tensions increase demand for the US dollar as a “safe haven,” hurting the rupee.

HOW RUPEE DEPRECIATION AFFECTS THE INDIAN ECONOMY

3. Imports Become Expensive → Inflation Rises

India imports critical items such as:

• Crude oil and natural gas
• Gold and silver
• Electronics and semiconductors
• Fertilisers and chemicals
• Defence equipment

When the rupee weakens:

• Oil becomes costlier in rupee terms
• Transport and logistics costs rise
• Manufacturing input costs go up
• Retail prices increase gradually

This phenomenon is known as“imported inflation.”It directly impacts:

• Fuel prices
• Electricity tariffs
• Food prices
• Household expenses
• Small business margins

Even if domestic demand is weak, inflation can remain high purely because of rupee depreciation.

4. Exporters Gain, But It Is Not a Complete Solution

A weaker rupee makes Indian exports cheaper in global markets. Exporters earn in dollars, but their costs are largely in rupees, so revenues automatically rise in rupee terms.

Key beneficiary sectors include:

• IT services
• Pharma exports
• Textiles and garments
• Auto components
• Specialty chemicals

However, this benefit works only if:

• Global demand remains strong
• Input costs do not rise sharply
• Trade disruptions are minimal

If the global economy slows, export growth remains limited even with a weak rupee.

5. Widening Trade Deficit & Current Account Pressure

Because imports become expensive immediately while exports rise slowly, thetrade deficit usually widens during rupee weakness. This leads to:

• Higher current account deficit (CAD)
• Increased dependence on foreign savings
• Higher need for external financing
• More exposure to global shocks

If the CAD rises beyond safe levels, it becomes a serious macroeconomic risk.

IMPACT ON INFLATION, INTEREST RATES & RBI POLICY

6. RBI’s Monetary Tightrope Walk

A weakening rupee pushes inflation higher. To control this, the RBI is often forced to:

• Maintain higher interest rates
• Absorb excess liquidity
• Intervene in currency markets using forex reserves

Higher interest rates lead to:

• Costlier home loans
• Expensive vehicle and personal loans
• Slower business expansion
• Reduced discretionary spending

This creates a difficult trade-off betweencontrolling inflation and supporting economic growth.

IMPACT ON FINANCIAL MARKETS

7. Stock Market Impact: Volatility First, Rotation Later

Short-Term Impact

A falling rupee makes foreign investors nervous because:

• Their returns shrink after currency conversion
• Risk perception of emerging markets increases
• Global funds move to safer assets

This results in:

• Heavy FII selling
• Sharp market corrections
• Increased volatility
• Pressure on mid-cap and small-cap stocks

Long-Term Impact (Sectoral Shift)

Not all sectors are affected equally.

Beneficiaries:

• IT services
• Export-oriented pharma
• Chemical exporters
• Global manufacturing suppliers

Negatively impacted:

• Oil marketing companies
• Aviation
• Capital goods
• Infrastructure firms
• FMCG companies using imported raw material

This leads tosector rotation rather than uniform market growth.

8. Bond Market & Borrowing Costs

A weak rupee increases:

• Risk premium demanded by foreign bond investors
• Government borrowing cost
• Corporate debt servicing burden
• External commercial borrowing costs

If bond yields rise sharply, it can crowd out private investment from the economy.

IMPACT ON FOREIGN CAPITAL & INVESTMENT FLOWS

9. Changing Behavior of FIIs and FDIs

Foreign investors earn returns from:

1. Asset price movement
2. Currency movement

If the rupee depreciates steadily:

• Even strong stock returns can turn negative
• Fresh FII inflows slow
• Profit booking accelerates
• Valuations face pressure

Long-term Foreign Direct Investment (FDI) may remain, but speculative capital becomes cautious.

IMPACT ON GOVERNMENT FINANCES

10. Rising Fiscal Pressure

A weak rupee increases:

• Oil and fertiliser subsidy burden
• Cost of defence imports
• Repayment burden of foreign debt
• Interest expenses

This can lead to:

• Higher fiscal deficit
• Increased government borrowing
• Reduced capital expenditure
• Long-term inflation risks

FUTURE IMPLICATIONS: WHAT LIES AHEAD?

If Rupee Depreciation Continues for Long:

• Persistent inflation becomes structural
• High interest rates suppress consumption
• Corporate profitability weakens
• Government finances remain stressed
• Stock markets remain volatile
• Economic growth slows
• Household purchasing power weakens

If Rupee Depreciation Is Gradual and Controlled:

• Export competitiveness improves
• Inflation stays manageable
• Foreign investments remain stable
• Interest rate cycle normalises
• GDP growth remains balanced
• Financial markets mature structurally

The Indian rupee’s movement is not just a currency story—it is a full economic, financial market, and policy story.

While mild depreciation is natural for a growing economy,persistent rupee weakness increases inflation, strains government finances, pressures financial markets, weakens consumer purchasing power, and raises macroeconomic risk.