The Indian Rupee’s drop to nearly ₹90 against the US dollar in 2025 is more than just an economic fluctuation; it symbolises deep, unresolved structural problems within the Indian economy. This decline exposes long-standing imbalances that were hidden mainly by temporary optimism fuelled by foreign portfolio investments and strong GST collections. The trajectory highlights critical missed opportunities to build a resilient, sustainable growth model.
The historical perception of the rupee-dollar relationship as a governance indicator under past regimes, especially the UPA, has shifted. Some once viewed dollar strength as a sign of economic health, but now, with the Rupee weakening under the NDA government, those perspectives have faded, overshadowed by current economic realities.
Economic Context Behind the Rupee Depreciation
The Rupee’s sharp fall in 2025 is mainly due to ongoing trade deficits, worsened by India’s heavy dependence on imports such as crude oil, electronics, and intermediate goods, which continue to exceed exports, widening the current account deficit. Making this worse are declining foreign investment inflows, linked to slowing GDP growth, aggressive interest rate increases by the US Federal Reserve, and geopolitical uncertainties, such as regional conflicts and trade tensions, that make investors cautious.
Outflows from Indian equity and bond markets have drained essential dollar liquidity, which earlier supported currency stability. Despite moderate headline inflation, the weakening Rupee raises the local cost of imports, heightening inflationary pressures and squeezing profit margins, especially for industries reliant on foreign currency loans and imported raw materials.
Immediate Effects on the Economy and Society
The Rupee’s depreciation briefly benefits exporters by increasing price competitiveness. However, this benefit is lessened by rising input costs from expensive imports. For average consumers, price increases on essentials like groceries, fuel, electronics, and personal care products directly raise living costs, mainly impacting lower and middle-income groups.
Corporations carrying dollar-denominated debt face higher repayment burdens, while increased prices for imported components deter investments. Investor confidence takes a hit as currency volatility signals underlying economic uncertainty. The Reserve Bank of India walks a tightrope: tightening monetary policy risks stifling fragile growth, while lax measures could exacerbate currency instability and inflation.
Structural Reasons India Missed the Economic Bus
India’s macroeconomic strategy overly relies on fleeting positive sentiment driven by volatile foreign portfolio inflows, neglecting the need for strong economic fundamentals. Manufacturing has stalled due to infrastructural shortcomings, regulatory hurdles, and a lack of skilled labour, hindering efforts to diversify exports. The country’s heavy reliance on imported crude oil and electronics continues to widen the trade deficit, highlighting limited progress in domestic self-reliance initiatives.
Political cycles and fiscal constraints delayed reforms needed to improve productivity and competitiveness. Populist spending diverted resources from infrastructure and human capital investments, undermining investor confidence and decreasing budgetary flexibility, which in turn weakened the Rupee’s stability.
Role of Large US USD-Hedged International Mutual Funds
Significant US mutual funds, such as PIMCO International Bond Fund (USD Hedged), T. Rowe Price International Bond Fund (USD Hedged), and Nuveen International Bond Fund, indirectly influence currency fluctuations through their capital flows. Although designed to lower foreign currency risk for US investors through hedging, these funds still trigger sudden capital inflows or outflows that influence currencies such as the Rupee, Pound, and Yen.
Rapid asset reallocations by such funds, triggered by shifts in global risk sentiment or policy uncertainties, can worsen foreign exchange volatility in emerging markets. For countries like India with existing economic vulnerabilities, these external financial dynamics increase pressure on their currencies. Additionally, financial markets controlled or influenced through these instruments act as indirect levers of economic influence, often aligning with broader strategic interests.
Why Currency Stability Requires Structural Strength
Currencies ultimately mirror the economic reality of their countries. While market sentiment influences short-term swings, lasting stability requires firm productivity, diverse and competitive exports, balanced trade, and sound fiscal management. For India, genuine Rupee stability depends on the following: –
- Improving productivity across sectors.
- Expanding competitive and diversified export industries.
- Reducing import dependence through domestic production and energy diversification.
- Maintaining fiscal discipline with targeted investments in infrastructure and skills.
- Executing consistent and transparent monetary policy that builds sustained investor confidence.
Policy Implications and the Path Forward
To address India’s current economic vulnerabilities and stabilise the Rupee, a multifaceted set of reforms and policy measures is imperative. Each proposed area of focus, ranging from infrastructure and labour reforms to fiscal strategy and central bank communication, carries significant implications for the broader economy and its resilience to global shocks. Understanding these elements in detail helps clarify how they interlock to support sustainable economic health.
Infrastructure Reforms: Removing Bottlenecks to Growth
India’s infrastructure, roads, ports, power supply, digital networks, and logistics are foundational for efficient manufacturing and export competitiveness. Bottlenecks such as congested ports, inadequate power infrastructure, and poor internal connectivity raise costs and delay production cycles, discouraging investment and limiting export scale and speed. Accelerating infrastructure development through enhanced public spending, facilitating private investment, and streamlining project approvals will reduce these costs and improve the reliability of supply chains.
A stronger infrastructure backbone reduces transaction costs, attracts Foreign Direct Investment (FDI), promotes the growth of domestic industries, and ultimately decreases reliance on imports by increasing productivity and supporting “Make in India” initiatives.
Labour Market Rigidities: Unlocking Workforce Potential
India’s labour laws and employment regulations, often described as rigid and complex, can deter formal sector job creation and the flexibility needed in a rapidly changing economy. Many businesses face challenges in hiring or restructuring due to cumbersome legal procedures, which impact adaptability, wage competitiveness, and the ability to scale operations.
Reforms that simplify labour regulations, promote skill development, and encourage formalisation of the workforce will unlock productivity gains. A more dynamic labour market enables industries to respond more effectively to global demand fluctuations, innovate, and adopt technology, thereby boosting manufacturing and exports.
Regulatory Simplification: Enhancing Business Environment
Complex regulatory frameworks, overlapping authorities, and lengthy clearance processes stifle entrepreneurship and foreign investment. Simplifying regulatory processes through digital governance, single-window clearances, and consistent policy implementation reduces uncertainty and administrative burdens.
Such reforms create a more predictable business environment, encourage new firms to enter the market, help existing firms expand, and improve India’s standing in global ease-of-doing-business rankings, thereby strengthening export-oriented sectors.
Energy Diversification: Reducing Import Vulnerability
India’s overreliance on imported crude oil and fossil fuels exposes the economy to volatile global energy prices, significantly impacting the trade deficit and inflation. Diversifying the energy mix by investing in renewable energy (solar and wind), biofuels, and increasing domestic oil and gas production is critical.
Energy diversification stabilises input costs for industries and consumers, decreases import bills, and enhances energy security. It also aligns with global climate commitments, attracting green investments and fostering technological innovation, which benefits export competitiveness in emerging sustainable sectors.
Strengthening Domestic Electronics and Chemicals: Building Strategic Industries
The high dependence on electronics and chemicals for imports creates supply chain vulnerabilities and drains foreign exchange reserves. Encouraging the growth of local electronics and chemicals industries by offering incentives, supporting research and development, and implementing protective trade policies can reduce the need to rely on imports
A vibrant domestic electronics and chemical industry supports the ‘Make in India’ vision, creates skilled jobs, and builds export capacity, ultimately contributing to a more balanced trade profile and currency stability.
Fiscal Policy Balance: Welfare with Productivity
India faces the dual challenge of sustaining essential social welfare programs that support millions of people while maintaining fiscal discipline to avoid macroeconomic instability. Over-reliance on populist spending without corresponding economic growth strains government budgets and limits the ability to invest in infrastructure, education, and technology, key drivers of productivity.
A balanced fiscal approach prioritises efficient targeting of welfare to those who need it most while protecting and increasing capital expenditure on productivity-enhancing sectors. This strategy supports inclusive growth without exacerbating deficits that fuel inflation or currency depreciation.
Deepening Financial Markets: Mitigating External Shocks
India’s financial ecosystem must evolve better to absorb volatility from global capital flows and currency fluctuations. Introducing and expanding market instruments such as Rupee invoicing for trade reduces exposure to foreign currency risk by settling exports and imports in the domestic currency. This alleviates pressure on the Rupee and lowers businesses’ costs.
Increased availability of practical currency hedging tools, such as futures, options, and swaps, allows exporters and importers to manage FX risk more effectively. A deeper, more liquid financial market also attracts longer-term investments and reduces abrupt capital flight during global shocks.
Reserve Bank of India Policy Communication: Building Trust
The Reserve Bank of India’s role is pivotal in maintaining economic stability. Clear, consistent, and credible communication from the RBI provides markets and investors with transparency into the central bank’s policy stance, interest rate intentions, inflation targeting, and currency management mechanisms.
Balancing inflation control with growth support requires a finely tuned monetary policy. Aggressive tightening may curb inflation but risk slowing the economy, while a too lenient stance could stoke inflation and worsen currency depreciation. Transparent communication helps set market expectations, reduces speculative volatility, and fosters confidence among domestic and foreign investors.
In sum, these reforms and measures are interconnected pillars for reviving and stabilising India’s economy and currency. Addressing infrastructure, labour, regulatory, energy, fiscal, financial market development, and central bank communication in a coherent, strategic manner will enable India to build a resilient economic foundation capable of withstanding global uncertainties, enhancing export competitiveness, and ensuring long-term currency stability.
Conclusion
The Rupee’s decline is not a mere market phenomenon but a symptom of deep-rooted structural issues that have been sidelined for too long. While depreciation may offer momentary export benefits, the broader implications—rising inflation, diminished investor trust, and increased economic uncertainty—are daunting.
The quiet apprehension in India’s economic corridors underscores the urgency for a fundamental shift in policy and mindset. Only through comprehensive reforms focused on strengthening economic foundations, encouraging productive investments, and achieving balanced trade can India restore Rupee stability and secure sustainable growth.
The Rupee today is a revealing signal, one that demands decisive, forward-looking action beyond superficial remedies.
“Currencies don’t lie. They reveal.”