What is driving the rupee down?

The Tribune

KEY ARGUMENTS PRESENTED

1. Foreign Funds Are Exiting Indian Markets
   Foreign portfolio investors (FPIs) are selling Indian shares, mutual funds, and bonds, withdrawing around ₹78,000 crore and converting rupees into dollars—placing downward pressure on the rupee.
2. Indians Are Buying More Gold
   Rising demand for gold increases dollar demand, further weakening the domestic currency.
3. RBI’s Limited Ability to Defend the Rupee
   The RBI sold $88 billion between January and September 2025, yet its intervention cannot continue indefinitely without risking inflation or exhausting reserves.
4. Contradictory Dollar Dynamics
   The rupee fell even though the dollar weakened globally, suggesting India-specific factors, not global ones, are responsible.
5. Weak Domestic Economic Conditions
   – Corporate profits slowing
   – Flat consumption growth
   – Companies cutting back expansion
   – Banks reducing loan margins
   – Demand for cars and homes slowing sharply in 2025
6. Monetary Policy Constraints
   The RBI cannot raise interest rates without damaging growth, nor cut them without risking inflation—creating a policy trap.
7. Impact of US Tariffs and Global Trade Tensions
   Trump's proposed tariffs and uncertainty about global markets have contributed to capital flight.
8. India’s Wealthy Are Buying Gold and Moving Assets Abroad
   This indicates declining confidence in India’s growth story.
9. Heavy Import Bill (especially gold)
   Imports of gold and other goods—especially in September–October—have worsened the current account and increased dollar demand.
10. Borrowings Not Supporting Productive Investment
    Firms are borrowing less, and much of the capital is going into gold rather than productive capacity.

 AUTHOR’S STANCE AND POSSIBLE BIASES

1. Strongly Critical of India’s Economic Fundamentals
   The author highlights only the negative aspects of the economy, with little mention of strengths such as services exports, FDI inflows, or manufacturing expansion.
2. Macro-Pessimistic Tone
   The narrative leans toward a crisis-focused interpretation, suggesting systemic weaknesses without discussing cyclical or global aspects.
3. Limited Engagement with Alternative Explanations
   Global risk aversion, geopolitical uncertainty, oil price dynamics, and interest rate differentials are underexplored.
4. Selective Use of Data
   Several figures (e.g., corporate profit declines, loan growth slowing) are presented without broader comparative context.

 PROS OF THE ARTICLE (Strengths)

1. Identifies Domestic Structural Weaknesses Behind Rupee Depreciation
The article moves beyond simplistic “strong dollar” explanations to focus on India-specific economic slowing.

2. Integrates Multiple Economic Indicators
Loan growth, corporate earnings, consumption trends, and gold imports are systematically connected.

3. Highlights Constraints on Monetary Policy
The analysis effectively outlines the RBI’s policy dilemma.

4. Draws Attention to Investor Sentiment
Linking foreign investment decisions to domestic confidence adds valuable nuance.

5. Raises Uncomfortable Questions about Growth Sustainability
The mention of wealthy Indians shifting money abroad reveals deeper anxieties within the economy.

 CONS OF THE ARTICLE (Limitations and Missing Dimensions)

1. Lack of Sectoral Balance
The article emphasizes weakness but omits sectors performing well (IT services exports, defence manufacturing, renewables, pharmaceuticals).

2. Overlooks Key Global Drivers
– US interest rate cuts or hikes
– global bond yields
– changes in risk appetite
– oil price fluctuations
These factors heavily influence emerging market currencies.

3. Weak Discussion of India’s External Resilience
India still has:
– comfortable forex reserves
– manageable CAD
– strong remittances
– globally competitive services exports
None of these are explored.

4. No Long-Term Historical Perspective
The rupee’s movement must be contextualized over decades to avoid overstating crisis narratives.

5. Limited Policy Analysis
The author critiques RBI constraints but does not discuss possible fiscal reforms, export strategies, or structural reforms.

6. Incomplete View on Investment Patterns
FDI inflows are ignored, though they play a critical role distinct from volatile FPI flows.

 POLICY IMPLICATIONS (UPSC GS-III: Economy)

1. Need to Boost Domestic Demand and Consumption
   Slowing consumption weakens investor sentiment and leads to capital flight.
2. Rationalise Gold Imports
   Possible strategies include gold monetisation schemes or reducing import duties to prevent smuggling.
3. Strengthen Industrial and Manufacturing Capacity
   A more robust productive base cushions vulnerabilities in the external sector.
4. Monetary–Fiscal Coordination
   RBI’s limited room requires complementary fiscal action—public investment, credit guarantees, and support to MSMEs.
5. Enhance External Sector Resilience
   Export diversification, services upscaling, and energy security can reduce pressure on the rupee.
6. Address Structural Constraints
   Slow job creation, rural distress, and high inequality influence domestic demand and investor confidence.
7. Promote Domestic Capital Formation
   Incentivising productive investment over gold accumulation is essential.

 REAL-WORLD IMPACT ASSESSMENT

1. Rupee Depreciation Increases Import Costs
   India’s heavy reliance on oil imports makes the economy vulnerable.
2. Inflationary Pressures May Rise
   Imported goods become costlier, impacting households.
3. Corporate Borrowing Costs Increase
   Companies need to hedge currency risk, raising operational costs.
4. Foreign Investors Become Cautious
   Continued depreciation creates uncertainty and reduces portfolio inflows.
5. Export Competitiveness May Improve Slightly
   But this benefit is limited when global demand slows.
6. Household Behaviour Changes
   Higher gold buying reflects reduced faith in financial assets.

 BALANCED CONCLUSION

The article succeeds in exposing the underlying domestic vulnerabilities driving the rupee’s decline—from weakening corporate performance to low consumption growth and declining investor confidence. It compellingly explains why the rupee is falling even when the global dollar is weak.

However, the analysis leans heavily on the negative side, overlooking India’s external buffers, strong services sector, remittances, and long-term structural reforms. A more balanced approach would weigh both cyclical and structural factors and examine policy options more rigorously.

The rupee’s depreciation is not a crisis in itself, but a signal. It reflects deeper questions about consumption, investment, productivity, and economic confidence that India must address to sustain its growth trajectory.

 FUTURE PERSPECTIVES (UPSC Mains-Ready Insights)

1. Strengthen structural reforms in labour, land, logistics, and credit markets.
2. Promote domestic manufacturing and export competitiveness through targeted incentives.
3. Develop a robust gold monetisation ecosystem to reduce reliance on imports.
4. Encourage financial market deepening to absorb domestic savings productively.
5. Safeguard monetary stability by enhancing RBI’s macroprudential toolkit.
6. Expand renewable energy to reduce oil import dependency.
7. Improve investment climate by ensuring policy stability and reducing compliance burdens.

A stable rupee ultimately depends on a strong real economy, predictable policy environment, and confidence among domestic and foreign investors.