RBI Grade BNABARD ESISEBI
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Context:
“RBI MPC Unpacked: Key Theory Meets Today’s Macro Trends”Tap to play · from the C4S channel
Right through September, every passing week, the Indian rupee (INR) has been hitting all-time lows in its exchange value with the US dollar (USD). On September 23, the lowest level of 88.6 rupees to a US dollar was recorded.
- INR has depreciated over 3% since Jan 2025, sharper than many emerging markets.
- Against Other Majors: Weakened versus euro and pound, indicating broad-based depreciation.
Causes of INR Weakness
| Cause | Details / Explanation |
|---|---|
| Trade Imbalance | – Exports stagnant due to global protectionism. – High imports of oil (~85% dollar-priced), electronics, fertilizers → worsens current account deficit (CAD). |
| Investment Slowdown | – Weak corporate earnings and global uncertainty → FPI and FDI inflows sluggish or negative. – Example: Net FPI outflows of $1.5 bn recently, reducing dollar supply. |
| Relative Currency Demand | – Higher global demand for USD over INR, especially amid global financial tightening. |
| Growth Concerns | – Subdued GDP growth (~6.1% in Q1 FY26) lowers investor confidence. |
| Global Financial Tightening | – Attractive US asset returns pull capital out of India. |
Impact & Way Forward
| Aspect | Details / Impacts |
|---|---|
| Negative Impacts of Rupee Depreciation | – Import Inflation: Costlier crude, fertilizers, electronics → domestic inflation rises. – Corporate Stress: Higher repayment burden on unhedged external commercial borrowings. – CAD Pressure: Expensive imports widen current account deficit. – Consumer Burden: Education, tourism, medical services abroad become costlier. |
| Positive Impacts of Rupee Depreciation | – Export Competitiveness: Indian goods cheaper in global markets. – Remittances & Tourism: NRIs benefit from higher rupee conversions. – Domestic Substitution: Encourages local manufacturing, supporting Atmanirbhar Bharat. |
| Policy Landscape – RBI Measures | – Limited intervention using $570 bn forex reserves to smooth volatility. – Avoids aggressive rupee defence to conserve reserves. |
| Policy Landscape – Government Fiscal Measures | – Reduce imports via PLI schemes, ethanol blending to cut oil imports. – Support domestic manufacturing and energy diversification. |
| Structural & Global Alignment | – Trade infrastructure: IMEC, National Logistics Policy. – Dedollarisation via BRICS+, local currency trade with UAE, Russia. |
| Way Forward / Recommendations | – Strengthen export competitiveness: High-value manufacturing, FTAs. – Diversify energy sources: Renewables, green hydrogen, ethanol blending. – Attract long-term capital: Policy stability, faster FDI approvals. – Enhance financial depth: Develop bond markets, promote rupee invoicing. – Calibrated RBI support: Smooth short-term volatility without exhausting reserves. |