DOES A WEAK RUPEE REALLY HELP INDIA'S ECONOMY ?

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Picture Courtesy: The Hindu

Context:

The Indian rupee fell to a record low of ₹90.41 per U.S. dollar, making it one of the weakest currencies globally.

 Causes of Rupee fall:

Investors moving to more attractive markets: Foreign Portfolio Investors (FPIs) have been withdrawing funds from India as global investors chase higher returns in AI-driven technology markets abroad.
For example, U.S. tech indices and semiconductor stocks have delivered double-digit quarterly gains, luring capital away from emerging markets like India. This trend intensified after delays in the India–U.S. trade deal, which temporarily reduced investor confidence in India’s near-term trade prospects.

Exports hit by tariffs and weak global demand: India’s export performance has suffered due to penal tariff actions by the United States, particularly affecting auto components, steel, electronics and textiles. According to Ministry of Commerce data, merchandise exports contracted in mid-2025, especially in labour-intensive sectors, signalling weakening external demand.
At the same time, slowing growth in Europe and China has created global demand uncertainty, reduced India’s export orders and worsened the trade balance.

Rising import bills despite lower domestic inflation: The rupee also weakened because India faced higher import costs, especially for crude oil and gold. Due to Western sanctions and reduced access to discounted Russian crude, India increasingly sourced oil from costlier markets, inflating energy imports.

External balances under strain: The rupee has also been affected by widening current account and capital account deficits a classic “twin deficit” challenge for emerging economies.
As export earnings declined and investment capital exited, the gap between India’s foreign currency inflows and outflows widened, thereby increasing demand for dollars.

 How depreciation can help India?

Enhances export price competitiveness: A weaker rupee lowers the foreign currency price of Indian goods and services. Example: During the 2008–09 global crisis, the rupee fall helped IT and textile exporters retain U.S. market orders as Indian services became cheaper.

 Deflects demand away from imports: Costlier imports encourage domestic buyers to shift towards local substitutes, improving the trade balance. Sectors like furniture, food processing, and garments often benefit when imports turn expensive.

 How depreciation does not always help India?

High import dependence cancels gains: India heavily imports crude oil, electronics, components, and defence equipment. Example: In 2013, rupee fall combined with high oil prices led CAD rising above 4.8% of GDP, showing depreciation can worsen deficits.

Pressure on essential sectors: While inflation is currently low, a persistently weak rupee can reintroduce imported inflation, particularly in fuel, edible oils, electronics, and machinery. In 2013, during the taper tantrum, the rupee fell from 54 to 68, causing fuel inflation to rise and forcing the government to increase diesel prices despite subsidy constraints.

Depreciation Triggers Capital Flight: Rising inflation and widening deficits reduce investor confidence. Case study: FPIs withdrew billions during early 2020 and mid-2022 phases, accelerating rupee decline — forming a depreciation–outflow feedback loop.

Structural Weakness Limits Export Response: Depreciation boosts price competitiveness, not production capability. Constraints like low productivity, poor logistics, skill gaps, and weak innovation capacity (R&D spend around 0.7% of GDP) restrict export scaling despite cheaper rupee.

 What are the alternative strategies, we need to work on?

Productivity-led competitiveness rather than currency weakness: India can gain from trade even when the rupee is strong if labour productivity and manufacturing efficiency improve. Example: Under the Auto Component Mission Plan (2006–16), Indian firms like Bharat Forge expanded exports through technology upgrades despite periods of a firmer rupee.

Strengthening real economic foundations: Investments in R&D, reliable energy supply, logistics, transport infrastructure and skilled human capital reduce production costs. Example: South Korea and Germany maintain strong currencies yet dominate global exports due to their technology-intensive industries.

Competitiveness Shift from Price Advantage to Capability Advantage: By raising efficiency and value addition, India moves from nominal competitiveness (weak rupee) to real competitiveness (productivity-driven), making export gains sustainable.

 What we can do now?

• Interest rate support for exporters: Exporters can be cushioned against volatility through targeted interest rebates, similar to India’s existing interest equalisation scheme for MSME shipments.
• Attracting stable foreign currency inflows: Offering attractive NRI deposit rates or dollar-denominated bonds can stabilise forex reserves. During 2013 rupee stress, RBI mobilised over $34 billion via FCNR(B) deposits, helping strengthen the rupee.
• Encouraging corporates to repatriate dollar earnings: Asking Indian companies to bring back or park their dollar receipts domestically boosts forex liquidity and supports exchange rate stability.
• Expanding currency swap arrangements: Swap lines between Indian and U.S. banks can ensure dollar availability in stressed periods; countries like South Korea and Indonesia have used similar arrangements to stabilise their currencies.

 Conclusion:
Currency depreciation can offer temporary price advantages, but India’s long-term export strength depends far more on productivity, innovation, and capacity building. Sustainable competitiveness comes from stronger infrastructure, skilled labour, and efficient industries but not a weaker rupee. while targeted policy tools can stabilise the currency and support external sector resilience.

 Source: The Hindu