By Saumitra Bhaduri
The economy is growing at more than 8%, yet the rupee has slipped past the 90-per-dollar level. The underlying dynamics indicate a deeper story about India’s external vulnerabilities, explains Saumitra Bhaduri
Economic contradictions
In the September quarter of 2025, India posted GDP growth of 8.2%, but during the same period, the rupee lost nearly 5% of its value. This happened while the US Dollar Index DX stayed broadly stable near 99, meaning the fall was not driven by global dollar strength. Instead, India saw foreign portfolio outflows of $16–18 billion this year, net foreign direct investment (FDI) stagnating around $30 billion, and a goods trade deficit of $25–30 billion every month. Capital is leaving just as import demand is rising—a combination which pulls the rupee down despite strong domestic output.
Anatomy of the fall
As the economy grows, India consumes more imported oil, raw materials, electronics and machinery — and therefore more demand for dollars. At the same time, global investors attracted by high US interest rates have been pulling money out of emerging markets, including India. The need for dollars is rising while the supply of incoming dollars is shrinking. When demand for dollars outpaces demand for rupees, the rupee must depreciate. What makes this decline notable is that it is not a reflection of domestic weakness but of external financing stress. High import dependence, slowing exports, and unstable capital flows form the structural backdrop to the fall. Even rapid output growth can’t fully compensate for these external pressures.
Why this is worrying for India
Despite the empirical parallels, India’s predicament is more serious because its depreciation is not cyclical but structural. Growth is strong, yet import dependence remains high. Exports have not kept pace with GDP. FDI inflows are softer. Portfolio flows are negative. If global risk sentiment deteriorates or if US yields remain the same, more capital could leave, pushing the rupee down further.
This matters because a weaker rupee touches almost every part of the economy. A sustained fall increases inflation risk, erodes household purchasing power, raises borrowing costs for companies with foreign-currency debt, and puts additional pressure on the Reserve Bank of India (RBI) to step in. A fast-growing economy facing a weak currency is not a contradiction — it is a call out for the fragility of India’s external balance.
Impact of the slide on exports and imports
The rupee’s fall has uneven consequences across sectors. Exports such as that of IT services, pharmaceuticals, and parts of the manufacturing sector may appear to gain from a weaker rupee, but the benefit is limited because most Indian exporters rely on imported components. When those imported inputs get costlier, the competitive advantage shrinks fast.
Import-heavy sectors bear the direct pain. Oil and gas companies, airlines, automobile manufacturers, electronics producers and chemical firms see costs tick up right away. Imported food items and medicines start turning costlier.
Overseas education and travel become costlier for households. The inevitable downstream effect is inflation.
Why hedging matters
These factors make hedging necessary, not optional. Several firms, particularly the mid-sized ones, remain unhedged, hoping that the rupee bounces back. But decades of emerging-market behaviour suggest that depreciation cycles take time to reverse. Hedging through forwards, options or natural offsets immunises businesses against volatility and prevents cash-flow shocks. In a world of fickle capital flows, “wait and hope” is not a strategy.
What the RBI should do
What is required is a calibrated and disciplined stance on the part of the central bank. The RBI’s intervention should be to monitor and iron out volatility, not to defend any particular level. Any attempt to defend a level will dissipate foreign-exchange reserves fast without removing the structural reasons for the fall. A correct approach will be to let the rupee
seek its market-compatible value, intervening only to prevent disorderly movements.
Monetary policy needs to remain focused on inflation dynamics, not exchange-rate angst. The need for clear communication is paramount: the RBI needs to underscore that its job is to ensure financial stability, not to engineer a strong rupee.
The bottom line
The rupee’s slide does not mean India’s growth numbers are suspect. It means that in a globalised, dollar-dominated financial world, even a fast-growing economy can struggle with external pressures. India’s challenge is not just to grow but to strengthen its external resilience through better export performance, higher-quality capital flows, effective trade negotiation and reduced vulnerability to swings in global sentiment.
The writer is professor, Madras School of Economics
