It is rare for investors to see strong policy action on both the monetary and fiscal sides in the same year. Measures such as income tax cuts, GST changes, and interest rate reductions have made this a year of major policy shifts. These actions along with geopolitical development have led to noticeable changes in financial markets.
While individuals have benefited from the various policy measures, the policymakers remain concerned about one issue—the weakening rupee.
The Indian rupee breached 90 per US dollar mark in December 2025, marking a depreciation of about 4.8% year to date in 2025. The slide has been sharper in real effective exchange rate (REER) terms, by nearly 10% when measured against a basket of other currencies, making the rupee one of the worst-performing major currencies of the year. The weakness has largely been driven by subdued capital inflows and US trade tariffs on Indian exports.
The “India-Specific” Decline
What makes this fall in the rupee unusual is what did not happen. Oil prices remained stable, which spared India from the pressure of a rising import bill. The US dollar also weakened during the year. Yet, the weakness in the rupee. This suggests that the decline was not driven by global factors but was largely specific to India.
A weaker currency inevitably ripples through the economy. It influences almost everything—Inflation, trade, corporate balance sheets and investment decisions. Companies that borrow in foreign currency feel the pressure as the cost of capital rises. Imports become costlier, squeezing margins in sectors dependent on overseas inputs.
The Inflation Cushion
For households, however, the impact is far more limited than many fear.
India’s self-sufficiency in food (46% weightage in inflation) keeps inflation low. A 5% fall in the rupee adds only about 35 basis points to inflation, barely noticeable in everyday expenses.
Having said that, it impacts purchasing power for foreign spendings. Indian households spend close to USD 3.5 bn (30k core) and USD 17 bn (1.5l crore) on foreign education and foreign travel, respectively. That becomes an expensive affair.
If depreciation creates discomfort on one side, it also opens doors on the other.
Currency depreciation has long been a quiet lever of trade competitiveness as a cheaper rupee makes Indian exports more attractive to the world. At a time when global trade faces the hanging sword of uncertain tariffs from US administration, even the small price advantage matters.
The Golden Silver Lining
Beyond trade, rupee depreciation has a silver lining for Indian households. According to a Morgan Stanley report, Indian households hold about 34,600 tonnes of gold, valued at roughly $3.8 trillion in 2025. A 5% rise in gold prices, driven by rupee depreciation, to around $190 billion. At the prevailing USD/INR rate of about ₹90, this translates to an additional ₹17 lakh crore in household wealth. boosting the net worth of Indian households holding gold.
A Strategic Adjustment
The current episode marks a clear break from the past; real interest rates are competitive, economic growth is healthy, and inflation is under control. Services exports continue to provide a strong cushion to the balance of payments. Unlike earlier periods, depreciation is not accompanied by macroeconomic instability. The economy is not scrambling to defend the currency; in fact, it is choosing to live with a weaker one; and it’s a better approach than protecting it too aggressively.
The currency protection has its own cost, through tight rupee liquidity in banking system, reduction in RBI reserves, and higher rate of interest.
Seen in this light, the recent weakness of the rupee appears less a sign of vulnerability and more a reflection of strategic adjustment. As long as depreciation remains gradual and orderly, supported by strong fundamentals, a weaker rupee may ultimately work in India’s favour.
Author:
Tejas Soman – Chief Investment Officer – Debt, PPFAS Mutual Fund
Shailja Choudhary – Manager – Economist, PPFAS Mutual Fund
Disclaimer:
“The opinions expressed here are solely our own and do not express the views of my employer.”
