RBI Grade BNABARD ESISEBI
In one line
The rupee has been under sustained pressure, driven by a combination of external shocks, capital outflows and domestic macro imbalances — even as India’s growth and reserves remain strong.
Context
Key Figures
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- The rupee has depreciated about 8 per cent in real terms over the past year, per the REER
- It touched an all-time low near ₹97 per dollar in May 2026
- Forex reserves reached a record $785.7 billion in the week ended 4 September
- The RBI mobilised $136.37 billion through its concessional swap facility
Major Reasons Behind Rupee Depreciation
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1. High Crude Oil Prices
- India imports over 85% of its crude oil.
- Brent crude crossed $100/barrel, nearing $110 amid West Asia tensions.
- Higher oil prices increase dollar demand and import costs, putting pressure on the rupee.
- Every $10 rise in crude prices may reduce India’s growth by about 44 basis points, according to Ind-Ra.
2. Foreign Capital Outflows
- Foreign investors selling Indian assets increase demand for foreign currency.
- FPI equity outflows: about $19 billion in 2025 and $25 billion in 2026.
- Around $13 billion flowed out in March 2026 alone.
- Net FDI: only about $0.4 billion in 2024-25, partly due to investment repatriation.
3. Narrower India-US Interest Rate Differential
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- A smaller gap between Indian and US interest rates can reduce the attractiveness of rupee assets.
- US rates were around 3.75–4%, while US Treasury yields also increased.
- This can encourage investors to shift funds towards US assets, adding pressure on the rupee.
4. Structural Trade Deficit
- India imports more goods than it exports, creating a persistent merchandise trade deficit.
- Services exports and remittances partly offset this deficit.
- CAD was around 0.6% of GDP in 2024-25 but may widen towards 2% of GDP.
- Higher prices of energy, fertilisers and sulphur can further increase import costs.
Key Terms
- Rupee Depreciation: Fall in the value of the rupee against foreign currencies, especially the US dollar.
- FPI: Foreign Portfolio Investment in assets such as shares and bonds without controlling the company.
- FDI: Foreign Direct Investment involving long-term investment in a foreign business.
- Trade Deficit: When a country’s imports of goods exceed its exports.
- CAD: Current Account Deficit, when a country’s payments to the rest of the world exceed its receipts.
- Interest Rate Differential: Difference between interest rates of two countries.
- Terms of Trade: Ratio of a country’s export prices to import prices.
- Basis Point (bp): 1 bp = 0.01 percentage point; 100 bps = 1 percentage point.
