The Indian Rupee (INR) has followed a downtrend in the US Dollar (USD) and, more recently, projected to slip further until it settles at about 100 INR per USD by December 2025.
This likely devaluation comes with huge economic implications to India, changing import expenses, thus shifting export dynamics, different and relative inflation rates, and foreign investment inflows.
So far, by February 2025, the rupee has slid down to its record low of 87.95 against the US dollar. It is part of a broader trend, with the rupee having depreciated around 3% throughout 2024, breaking the 85 mark in December 2024.
Several macroeconomic factors, including the monetary policies of the US Federal Reserve, the growing current account deficit of India, rising inflation, and capital outflows by foreign investors, contribute to the fall in the value of the rupee.
These factors play a crucial role in understanding and analyzing the India economy, as well as determining the impact for policymakers, businesses, and investors. This report delves into the reasons why the rupee is falling, its potential consequences, and countermeasures to reduce its further decline.
Present Exchange Rate and Historical Trends
The Indian Rupee has at times depreciated against the dollar due to a combination of worldwide and domestic economic factors. Several historical trends describe the rupee’s battle with the US dollar:
1. 2022-2023: The rupee hovered around 81-83 against the USD, experiencing volatility due to global inflation concerns, US interest rate hikes, and geopolitical uncertainties.
2. 2024: The rupee breached the 85 mark in December 2024 after weakening by 3% over the year.
3. February 2025: The rupee fell to an all-time low of 87.95 against the dollar.
4. Future Prediction: Analysts expect further depreciation, with some forecasts suggesting it could reach 100 INR per USD by December 2025.
This steady decline indicates a complex interplay of global monetary trends, India’s economic fundamentals, and market sentiments driving exchange rate fluctuations.
Factors Contributing to the Predicted Depreciation
Several factors are driving the rupee’s downward trajectory, making the prediction of INR 100 per USD a real possibility.
1. US Federal Reserve’s Monetary Policy
The US Federal Reserve plays a crucial role in shaping global currency markets.
The Fed’s interest rate decisions impact capital flows worldwide, influencing the strength of the US dollar against other currencies, including the rupee.
- If the Fed continues raising interest rates to combat inflation, USD-denominated assets become more attractive to global investors.
- A stronger dollar puts pressure on emerging market currencies like the rupee, causing depreciation.
- Recent US economic data, including robust labor market figures and potential trade tariffs, have strengthened the USD further.
With high US interest rates, capital flows out of emerging markets like India, reducing foreign investments and weakening the rupee.
2. India’s Current Account Deficit
India’s current account deficit (CAD) has been widening due to increasing imports and relatively slower export growth.
A current account deficit occurs when a country imports more goods, services, and transfers than it exports, creating an imbalance in foreign exchange inflows and outflows.
- From April to November 2024, India’s trade deficit expanded by 18.4% year-on-year.
- Balance of payments deficit for the fiscal may lie in the range of $20-$30 billion.
- The growth in the trade deficit enhances demand for foreign currency. It consequently presses down on the rupee.
If CAD is going to grow further then in 2025, further depreciation pressure can be seen for the rupee.
3. High Inflation Rates
Domestic inflation is another factor that determines the currency value. The higher inflation in India makes exports less competitive and lowers investor confidence.
- Inflation increases the prices of Indian products for overseas consumers, thereby decreasing the demand for exports.
- Domestic prices increase with inflation, thus lowering the purchasing power of consumers and businesses, thereby affecting economic growth.
- Inflation further increases the costs of manufacturers, which is challenging to maintain the competitive pricing of products in global markets.
Sustained inflationary pressures and a slowing economy may lead to the rupee’s continued depreciation.
4. Foreign Investment Flows and Capital Outflows
Foreign investment has had a very crucial role to play in the stabilization of the rupee. The capital outflows, caused by global uncertainties and economic issues at home, are the major factors behind devaluation in the rupee.
- Foreign portfolio investors withdrew huge amounts from Indian equities and bonds in 2024.
- Weakness in the rupee had been further added on by reduced FDI due to global economic uncertainty.
- If the trend of capital outflow continues in 2025, further pressure could be subjected upon the rupee.
Impact of Weaker Rupee in Indian Economy
Economic Implications of a Rupee at 100 per USD will be comprehensive:
1. Imports will become costlier.
India is an importing nation and now primarily imports crude oil, machinery, and electronic items. A weaker rupee will make it difficult for importers to import such items.
- Higher import bills increase the current account deficit, further weakening the rupee.
- Rising costs for essential imports like crude oil could fuel domestic inflation.
- Businesses reliant on imported raw materials would face higher production costs, impacting profit margins.
2. Export Competitiveness
A depreciated rupee can make Indian goods and services more affordable for foreign buyers, potentially boosting exports. However, this advantage may be offset by other factors:
- If global demand continues to be weak, the advantage of a weak rupee would not necessarily be passed on as increased export earnings.
- Inflation-driven increases in domestic production costs may offset the currency benefit.
- The export sector needs to stay competitive on quality and price to reap the full benefit of a weak rupee.
3. General Inflation and Consumer
A weakening rupee directly impacts domestic inflation:
- Higher importing costs translate directly into higher costs for essential commodities and services
- Low purchasing power increases the cost for consumers to pay for goods bought.
- The Reserve Bank of India is likely to make adjustments in terms of interest to check inflation as well, resulting in lower growth rates.
Now, some may argue that with the rupee’s likely weakness, the counterbalancing trend can be affected by the following factors:
1. Reserve Bank of India’s interventions
The RBI has a history of intervention in the forex market to stabilize the rupee:
- It can sell foreign exchange reserves to check over-depreciation.
- Interest rate adjustments could help attract foreign capital and stabilize the currency.
- Recent interventions include selling dollars through state-run banks to prevent a sharper decline.
2. Global Economic Shifts
Unforeseen global events could shift the rupee’s trajectory:
- A fall in global crude oil prices would reduce India’s import bill, thus supporting the rupee.
- Changes in global trade policies may affect USD strength, thus indirectly benefiting INR.
- Easing geopolitical tensions would improve investor sentiment and bring capital back to emerging markets.
3. Domestic Economic Reforms
Structural economic reforms would improve investor confidence and support the rupee:
- Policies supporting manufacturing, infrastructure, and exports would improve India’s trade balance.
- Simplifying foreign investment regulations could attract capital inflows.
- Strengthening fiscal discipline and reducing the fiscal deficit would enhance economic stability.
Multiple economic factors, such as US monetary policies, India’s current account deficit, inflation, and foreign investment trends, are driving the Indian Rupee to a possible decline to 100 per USD by December 2025.
Depreciation does pose problems like higher import costs and inflationary pressures but also offers benefits like improved export competitiveness.
However, the RBI’s interventions, global economic shifts, and domestic reforms could mitigate the rupee’s decline.
The dynamic nature of currency markets means that while a weakening rupee is a concern, proactive policy measures and favorable global conditions could change this trajectory.
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