In January 2025, the Indian rupee fell to an all-time low of about ₹86.63 against the US dollar, with analysts warning it could even slip past ₹90. The fall has been driven by a strong dollar, climbing US bond yields, oil-price volatility from West-Asia and Red-Sea tensions, and heavy foreign portfolio outflows. The phrase “Trump tantrum” has been used for the renewed fear of US tariffs, tax cuts and deportation-driven inflation that keeps the US Fed hawkish.
Example Quick scoreboard of recent rupee lows: ₹68 (2013 taper tantrum) → ₹74 (2018) → ₹76 (COVID-19, March 2020) → ₹83 (Oct 2022) → ₹86.63 (Jan 2025). The slide is now a long-run trend, not a one-off event.
Analogy Imagine the rupee as a marathon runner who started strong, then keeps losing pace every few kilometres because of headwinds — oil shocks, FII exits, dollar strength. The runner is not collapsing, just steadily slowing down. RBI is the support crew handing out water (forex reserves) to keep the runner upright.
The Two Faces of the Exchange Rate: NEER and REER
When the newspaper reports “the rupee fell to ₹86 against the dollar,” that is only the bilateral, nominal rate. But India trades with dozens of countries and inflation is not the same everywhere. To capture the true competitive picture, economists use NEER and REER.
Core Concept NEER (Nominal Effective Exchange Rate) is the rupee’s value against a weighted basket of currencies of India’s trading partners — without adjusting for inflation. REER (Real Effective Exchange Rate) is the same basket, but adjusted for inflation differentials between India and those partners. NEER answers “How many foreign currency units does my rupee fetch?” REER answers “How much foreign stuff can my rupee actually buy?”
Analogy Think of your salary. NEER is your CTC on paper. REER is your real purchasing power after accounting for inflation in your city. A 10% raise (NEER up) feels like a pay cut if your city’s inflation is 12% (REER down). For India, the opposite has happened — even though the rupee’s number is falling (NEER down), Indian goods have not become cheaper for foreigners because Indian inflation has been higher than partner-country inflation (REER actually up).
Example RBI/BIS data: between April 2004 and November 2024, India’s NEER fell from about 118.5 to 91.8 — a clear nominal depreciation. Over the same span, the REER moved differently and stood at about 108.14 in November 2024 — meaning Indian goods, in real terms, have become more expensive abroad, not cheaper.
Analogy Picture two shopkeepers — one in Delhi and one in Dubai — selling the same kurta. The rupee weakening should have made the Delhi kurta look cheaper to the Dubai buyer. But if Delhi’s prices have also climbed sharply, the Dubai buyer still finds it expensive. That gap between expected price and real price is what the rising REER captures.
India’s Unique Position: Category 2
A BIS comparison of 62 countries between January 2019 and November 2024 placed countries into four buckets based on how their NEER and REER moved:
Category
What happened
Interpretation
1
Both NEER and REER appreciated
Currency strengthened in nominal and real terms.
2
NEER depreciated but REER appreciated
India sits here — nominal fall, but goods got costlier in real terms.
3
Both NEER and REER depreciated
Most emerging economies — the “textbook” rupee-style depreciation.
4
NEER appreciated but REER depreciated
Rare — strong currency but cheaper goods in real terms.
UPSC Tip Memory trick: India is the “odd one out.” Most countries are in Category 1 or 3. We are in Category 2 — because our domestic inflation has eaten away the export advantage that a weaker rupee should have given us. This is the editorial’s main argument.
Exchange-Rate Regimes: Three Ways to Run a Currency
Fixed Exchange Rate
The central bank pegs the currency at a chosen value. To defend the peg, it sells reserves when demand for foreign currency rises. Bretton Woods (1944–71) and earlier Indian regimes worked like this.
Analogy Like the government’s LPG cylinder subsidy. The price is fixed by policy — and to keep it fixed, the government burns subsidy money whenever crude oil rises. Hold the price too long, and the reserves (subsidy budget) run dry.
Floating Exchange Rate
The currency’s value is decided purely by market demand and supply. The central bank does not intervene; instead, the currency itself moves. Examples: US dollar, euro, Japanese yen.
Analogy Like onion prices in a mandi. Nobody fixes them — buyers and sellers haggle and a price emerges. Some days you cry over ₹120/kg, other days you laugh at ₹15/kg.
Managed-Floating Exchange Rate (India’s Model)
The currency is mostly market-determined, but the central bank intervenes when volatility becomes excessive — through both reserve operations and signalling. India has followed this since 1993.
Analogy Like an umpire in a cricket match. The umpire does not score for either side, but steps in when the game becomes unsafe — a no-ball, a wide, an unfair delivery. RBI plays umpire to keep the currency game fair, not to decide the score.
Example In FY 2022–23, the RBI sold about USD 25 billion from reserves to slow the rupee’s fall. It did not target ₹80 or ₹82 — it simply smoothed the slide. That is the managed-float approach in action.
Why Is the Rupee Falling Now?
The editorial groups the reasons into five drivers. Each has a story behind it.
Strong US dollar: A resilient US economy and the expectation of fewer Fed rate cuts have pushed the Dollar Index to multi-year highs. When the strongest student gets stronger, every other currency looks weaker.
High US bond yields: Higher yields (10-year Treasury above 4.5%) make US bonds more attractive than emerging-market debt, pulling capital away from India.
Policy uncertainty (“Trump tantrum”): Fears of new tariffs, mass deportations and tax cuts that could fuel US inflation have kept investors cautious about emerging markets.
Oil-price volatility: The Russia-Ukraine war, Middle East tensions and Red Sea shipping disruptions keep India’s oil import bill unpredictable. India still imports nearly 88% of its crude.
FPI outflows: Heavy selling by foreign portfolio investors in Indian equities (often in tens of thousands of crores in a single month) reduces dollar supply in the local market.
Example Stability check: An SBI report noted that despite the slide, the rupee fell only about 3% against the dollar — far less than many emerging-market peers. Part of the cushion came from India’s inclusion in JP Morgan’s Global Bond Index in mid-2024, which brought in passive bond inflows.
Analogy Think of the rupee as a boat in choppy seas. Five waves are hitting it from different sides — the US dollar wave, the bond-yield wave, the policy-uncertainty wave, the oil wave, and the FPI wave. The boat is rocking, but India’s reserves and the bond-index anchor keep it from capsizing.
Higher debt servicing: Indian firms with dollar loans need more rupees to repay the same dollar amount.
Students and travellers pay more: Foreign tuition fees and overseas trips become more expensive in rupee terms.
RBI’s dilemma: Cutting rates to support growth makes the rupee weaker still; holding rates high to defend the rupee hurts investment.
Example An MBA at a US university costing USD 80,000 cost roughly ₹64 lakh at ₹80/USD. At ₹87/USD, the same course costs almost ₹70 lakh — a ₹6 lakh hit without any change in tuition.
Effect on Net Exports
In theory, a weaker rupee should make Indian goods cheaper abroad and boost net exports. But this works only if (a) the real exchange rate (REER) also depreciates, and (b) export volumes actually respond to lower prices. India’s recent experience violates both conditions — REER has appreciated, and many exports use imported inputs whose costs rise with the rupee’s fall.
Analogy Imagine a sweet shop that drops its price tag from ₹100 to ₹90 to attract more customers, but the cost of sugar and ghee has risen so much that the shop now actually loses ₹5 per box. The lower price is illusory. That is exactly what a falling NEER with rising REER does to Indian exports.
Impact on Domestic Prices
A weaker rupee makes imported inputs costlier — crude oil, electronics, fertilisers, edible oil. In oligopolistic markets, firms do not just pass the cost on; they often add a higher mark-up over their variable costs. The editorial highlights that the mark-up of non-financial firms in India climbed to about 1.58 by 2025, meaning sales prices are running well ahead of input costs.
Core Concept The markup story (very examiner-friendly): In a few-seller market, firms have pricing power. When input costs rise by ₹1, they often raise prices by ₹1.5 or ₹2 — partly cost pass-through, partly opportunistic. This is a structural reason why rupee depreciation feeds into Indian inflation faster than into export competitiveness.
Analogy Like a hostel mess where there are only two tea stalls. If milk prices go up by ₹2, both stalls quietly raise tea prices by ₹5 — knowing students have nowhere else to go. Now imagine this happening across an entire economy.
Impact on Import Bills
India is structurally import-dependent on energy and several essential commodities. A weaker rupee hits these the hardest.
Crude oil: ~85–88% import dependency. A 5% rupee fall directly adds tens of thousands of crores to the import bill.
Pulses, fertilisers, electronics, gold: all sensitive to rupee weakness.
Higher oil cost → higher transport cost → higher prices for vegetables, food, FMCG.
Example A 10% rupee depreciation, with crude at USD 80/barrel, can add roughly USD 12–15 billion to India’s annual oil import bill — almost 0.4% of GDP.
Sectoral Impacts: Winners and Losers
Winners (Export-oriented)
Losers (Import-dependent)
IT services — earn in USD, costs in INR
Oil & gas — refining, retailing
Pharmaceuticals — large export base
Power & energy — coal, equipment imports
Textiles & garments — labour cost in INR
Electronics & smartphones — chips, displays
Gems & jewellery (export-grade)
Chemicals & fertilisers
Engineering goods, auto components
Aviation — ATF + lease payments in USD
Example Aviation pain point: Indian airlines pay aircraft lease rentals and a chunk of fuel costs in dollars. A weaker rupee directly squeezes margins. This is why airlines hike fares almost in lockstep with sharp rupee falls.
6. Way Forward
Track the effective rate, not just ₹/USD: Policy must look at the rupee’s value against a basket of currencies (NEER and REER), not headline dollar quotes.
Anchor interest rates to domestic inflation: Use the repo rate to manage inflation, not to defend an exchange-rate level.
Repair structural fundamentals: Cut the fiscal deficit, narrow the CAD, sustain inflation-targeting credibility, and improve ease of doing business.
Be transparent: RBI should communicate the rationale of every intervention. Clarity reduces speculative attacks.
Support exporters strategically: Production-Linked Incentives, RoDTEP, interest-equalisation, and trade-finance support — especially for sectors with high domestic value-add.
Cushion import-dependent sectors: Diversify crude sources, accelerate the energy transition, push semiconductor manufacturing (India Semiconductor Mission), and build edible-oil self-reliance (NMEO-OP).
Internationalise the rupee: Encourage rupee invoicing in trade, deepen rupee-settlement mechanisms with partners like UAE, Russia and Sri Lanka.
UPSC Tip In your answer, always pair a problem with a policy lever already in motion. “Imported inflation” → “Inflation targeting framework, MPC, food buffer stocks.””Oil dependence” → “NMEO-OP, energy transition, ethanol blending.” This shows the examiner you read the news and the syllabus together.
7. Conclusion
A weaker rupee is neither a crisis to panic over nor a windfall to celebrate. What India needs is a balanced exchange-rate policy that distinguishes short-term shocks from long-term competitiveness, an RBI that targets volatility (not levels), and a transparent communication strategy. Above all, the editorial reminds us that the textbook benefit of depreciation — cheaper exports — does not arrive automatically. It requires fixing the structural problems behind India’s stubbornly high REER: domestic inflation, oligopolistic mark-ups, and dependence on imported inputs.
Analogy Currency is the mirror of the economy. Polishing the mirror (intervention) won’t change the reflection unless we also fix the face — productivity, inflation discipline, and structural reform.
8. PYQ and Practice Question
Related PYQ (UPSC CSE Mains 2018)
“How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India?”
Practice Question
“Discuss the macroeconomic impacts of rupee weakening on India’s economy. Highlight both the positive and negative effects, and suggest measures to mitigate the adverse impacts.”
Suggested Answer Structure (250 words)
Intro (3-4 lines): Define rupee depreciation. Anchor with the January 2025 figure of ₹86.63/USD.
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