The Indian rupee’s fall past the ninety mark has revived an old question: Why does the currency of a large, fast-growing economy continue to weaken against the US dollar decade after decade? India’s GDP
has expanded steadily, foreign exchange reserves have soared, exports have diversified, and global confidence in India’s long-term prospects has strengthened. Yet, the rupee has moved in only one direction—downward—from the fixed days of the post-colonial peg to the managed float of today.
Much of the public debate tends to focus on isolated triggers:
- a spike in oil prices
- stalled trade talks
- a change of government in the US
- tariff wars or
- a sudden sell-off by foreign investors.
These factors do matter in the short run, as seen in the recent slump driven by heavy capital outflows, delays in India-US talks, record trade deficits and firm demand for dollars from importers.
But the deeper reasons behind a weakening rupee are broader, structural and stubborn. They predate single governments, outlast individual policy cycles and reflect the global monetary order as much as India’s domestic economic framework.
What really drives a currency
If more people want a currency, its value rises. Central banks, in turn, can intervene by selling or buying currency to influence market movements.
However, this is only the surface layer of a far more complex landscape. Beyond short-term trades, currencies are shaped by four major principles:
Purchasing power parity
Over long periods, exchange rates adjust so that the same basket of goods costs roughly the same across countries. If one country consistently has higher inflation than another, its currency must weaken to maintain parity. India’s inflation has historically exceeded that of the US, giving the rupee a long downward slope.
Interest rate parity
Higher interest rates attract capital, but only in relative terms. The US Federal Reserve’s rate decisions ripple across the world because the dollar is the global reserve currency. When US rates rise faster than Indian rates, foreign investors shift money toward the dollar, pushing down the rupee. The Reserve Bank’s repo rate changes cannot offset this asymmetry.
Balance of payments
A country that imports more than it exports needs more dollars than it earns. India’s current account deficit, driven heavily by crude oil and gold imports, creates persistent dollar demand and exerts downward pressure on the rupee.
Reserve currency dominance
Nearly nine out of ten global transactions involve the US dollar. In times of uncertainty—from wars to financial shocks—global money rushes into the safety of US assets. This “safe-haven” effect strengthens the dollar even when the US economy is not performing dramatically better than its peers.
Gold reserves no longer determine currency strength. The global abandonment of the gold standard in 1971 means that a country like South Africa, despite large gold holdings, does not automatically have a strong currency.
Long slide: From Independence in 1947 to liberalisation in 1991
At independence, the rupee was pegged to the British pound. Its value against the US dollar—often quoted around Rs 4.76 per dollar—reflected a fixed system rather than a market-determined reality.
In the decades that followed, wars, droughts and fiscal pressures triggered several devaluations. The rupee did not fall freely; it was managed. By the late 1980s and early 1990s, the overvalued rupee became increasingly unsustainable, contributing to a balance-of-payments crisis. India’s foreign exchange reserves were dangerously low, covering barely two weeks of imports.
The 1991 reforms, initiated under PV Narasimha Rao and supervised by the IMF and World Bank, forced India to make the rupee partially convertible and accept market-linked valuation. The rupee dropped sharply, then stabilised at a new level. What looked like a fall was actually a correction—the cost of artificially holding currency at a level the economy could not support.
Why rupee kept weakening even as India grew rapidly
India’s economic success over the past three decades did not reverse the rupee’s direction. The economy expanded from about half a trillion dollars to several trillion. Forex reserves climbed above six hundred billion dollars. Exports of services boomed. Yet the rupee moved from around Rs 31 per dollar in the early 1990s to around Rs 90 today.
This long-term movement reflects three structural features:
Higher inflation
India has consistently recorded higher consumer inflation than the US. Even a modest gap, sustained over decades, forces the currency to adjust downward.
Import-intensive growth
India’s growth has depended heavily on imported oil, machinery, electronics and intermediate goods. When global oil prices spike—as in 2008, 2012 and 2022—India’s import bill balloons, widening the current account deficit.
Volatile capital flows
Foreign portfolio investors have frequently exited emerging markets during global shocks. The 2013 taper tantrum, the 2020 pandemic crash and periods of geopolitical tension have all triggered outflows. Each exit pushes the rupee downward.
The US economy did not always outperform India in these years. But the dollar retained its centrality in global finance, giving American monetary policy global reach that Indian policy cannot match.
Tariffs, deficits, oil prices, unstable flows
A cluster of domestic and international stresses triggered the latest fall past 90:
- India-US trade negotiations stalled, and new tariffs hit Indian exports
- foreign investors withdrew large sums from Indian equities
- gold imports rose sharply while exports to the US fell
- global crude oil prices remained elevated
- the unwinding of yen carry trades shook Asian currencies
- the Reserve Bank refrained from big-time intervention, allowing the rupee to find its level
These stress points match earlier episodes under different global conditions. The underlying trajectory is the same: India’s exposure to expensive imports, capital volatility and the dollar-centric world order keeps the rupee under pressure.
Political economy of weak rupee: Exporters versus consumers
A striking feature of India’s currency story is the persistent influence of exporter lobbies. Whenever the rupee shows signs of strengthening—usually due to foreign inflows—export-oriented industries complain that a stronger rupee hurts competitiveness. Successive governments, across parties, have quietly encouraged the RBI to cap sharp appreciation.
From textiles to IT services, exporters prefer a weaker rupee because it makes their invoices more valuable in rupee terms. In recent months, exporters even asked for temporary dollar settlements at artificially favourable rates. These are not isolated cases. Over the past fifteen years, similar pressure has produced repeated interventions to prevent the rupee from rising too quickly.
This benefits exporters but imposes costs on a largely import-dependent economy. A weaker rupee makes fuel, electronics, machinery and fertiliser more expensive. It raises inflation for ordinary consumers and constrains growth for industries that need imported inputs.
The state often balances these pressures with foreign exchange reserve accumulation. Yet overreliance on intervention risks masking deeper weaknesses and slowing the shift towards higher-value exports.
Why RBI’s repo rate cannot match Fed’s influence
The US Federal Reserve’s rate hikes attract global capital because the dollar anchors the international system. When the Fed raises rates sharply, foreign investors shift out of emerging markets almost automatically.
The RBI’s repo rate affects domestic lending, inflation and credit conditions, but it does not set global risk appetite. Even when the RBI raises rates in step with the Fed, the rupee weakens because India carries emerging-market risk, higher inflation and a current account deficit.
In effect, the Fed moves the world; the RBI stabilises India.
Why older explanations still hold: Depreciation during Biden’s years
The rupee weakened throughout the period when no major tariff shocks or dramatic domestic crises were present. The primary forces during those years were:
- aggressive Fed rate hikes
- a global spike in crude oil prices after the Ukraine conflict
- risk-off behaviour by investors
- persistent Indian import bills for gold and energy
The explanation does not lie in isolated events but in structural features that have been present for decades.
Long-term solution: Building real strength into rupee
Import substitution—reviving domestic production in areas where India depends heavily on foreign goods—is a logical response. It is also the underlying spirit of Aatmanirbhar Bharat. But this shift will take time. Advanced manufacturing, semiconductor ecosystems, energy diversification and capital-heavy R&D need sustained investment for many years.
A strong currency ultimately reflects productive power, not policy signals. The only durable path to a stable or appreciating rupee is a structural transformation of the Indian economy.
A long-term strategy might involve:
- sharply reducing reliance on imported crude through renewable energy and electric mobility
- moving Indian manufacturing up the value chain to compete in high-tech sectors rather than relying on low-cost exports
- building deeper domestic capital markets to reduce dependence on volatile foreign portfolio flows
- improving productivity through better logistics, education and innovation ecosystems
- expanding non-oil exports and services, which generate steady dollar inflows
- diversifying trade partnerships so external shocks have less impact
A future in which the rupee stabilises or strengthens is not impossible. It simply requires building an economy that does not need a weak currency to stay competitive and does not depend on global capital cycles to stay stable.
In short, the rupee will strengthen sustainably only when India strengthens the real foundations of its economy—not through intervention or resistance to appreciation, but through deep, long-term structural transformation.
The author is a senior journalist and writer. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect News18’s views.
