THE rupee’s sharp fall in recent months — it has depreciated by about 6% since the Iran war began in late February — reflects vulnerabilities in India’s import sector. While currency woes are not unusual for emerging economies, the present decline appears far more worrisome because it is unfolding amid geopolitical instability, rising crude oil prices, persistent inflation and slowing global growth. Together, these pressures have created a fragile environment in which the rupee’s weakness could trigger wider economic disruptions.
India imports more than 88% of its crude oil requirements, along with essential commodities such as edible oils and fertilisers. As the rupee slides against the dollar, these goods have become costlier. Rising fuel prices, in particular, are having a ripple effect on transport, food and household expenses. The depreciation is also keeping corporates and policymakers on tenterhooks. Indian companies with foreign currency borrowings are facing higher repayment obligations, while widening trade deficits are putting additional pressure on the current account deficit. Persistent foreign portfolio outflows have worsened the situation, as global investors move funds to safer US assets amid uncertainty. Although the Reserve Bank of India (RBI) has intervened through forex reserves to curb volatility, such measures can only moderate the pace of decline.
Arvind Panagariya, Chairman of the 16th Finance Commission, has argued that allowing the rupee to depreciate naturally could help correct trade imbalances over time. He has urged the RBI to look past specific exchange-rate milestones (such as Rs 100 per dollar) when navigating currency fluctuations triggered by global supply disruptions. However, unchecked depreciation carries serious risks, especially when driven by speculative capital outflows rather than economic fundamentals. Policymakers must strike a careful balance between allowing market adjustments and preventing excessive volatility. Managing inflation and maintaining investor confidence will remain crucial to ensuring India’s economic stability.
