Even as the rupee closed at a new historic low of 86.58 against the US dollar on Monday, the steepest single-day fall in nearly two years, economists maintained that this was an adjustment that was both warranted and inevitable. The rupee is overvalued and there is a need for the Reserve Bank of India to step back a bit and let it adjust, they said.
For exporters, this could be a boon, but a lot will depend on movements of the currencies of countries that are competing with India. The export sectors that can hope to reap benefits are those where the local content dominates like cotton textiles, leather and agriculture products. This augurs well as the share of some of the labour-intensive sectors in India’s exports has been falling.
Expectations of a further depreciation and the three-month forward rates that are around Rs 70 to a dollar can allow space for exporters negotiating new orders to offer better rates, analysts said. “India’s basic balance of payments deficit is widening when portfolio inflows and the domestic economy have slowed. The rupee is overvalued,” said Dhiraj Nim, economist at ANZ Research.
Compared with Southeast Asian currencies, the rupee remains relatively stable, but its moves are now increasingly in line with regional currencies. The rupee’s earlier stability against depreciating regional peers over 2024 had resulted in bilateral appreciation and loss of competitiveness, Nim observed. “In the calendar year 2025 so far, the rupee has depreciated 1% against the dollar, ranking 3rd among 23 emerging market peers,” Garima Kapoor, an economist at Elara Securities, said.
Engineering Export Promotion Council chairman Pankaj Chadha said: “Only beneficiary of the falling rupee would be exporters who are getting payments now or are shipping out orders contracted earlier. Those who have not hedged their receivables may reap a windfall. However, such gains typically last for 10-120 days only, as in new contracts, buyers will drive down prices based on the exchange rate outlook prevailing then.”
“Those who have made advance billing of rice exports would immensely benefit from a decline in the value of the rupee against the dollar,” said Vijay Setia, managing director, Chaman Lal Setia exports, an exporter of aromatic rice. In FY24, India, the largest exporter of rice, shipped $10.4 billion worth of basmati and non-basmati rice. In the April-November period of this fiscal, rice exports saw a sharp spike of over 13% to $7.31 billion as all restrictions on shipment were lifted.
In the case of pulses, whose imports surged to a record $3.75 billion in FY24 due to lower domestic production, the fall in the rupee may not significantly push up the cost of imports. This is because the volume of imports may come down given robust domestic crops prospects.
Exporters of India-made cars, two- and three-wheelers, are expected to see higher realisations, thanks to a weaker rupee.
While import costs are seen to rise, these fears are allayed to an extent. “Inflationary pressures are likely to remain capped as energy inflation remains muted in FY25TD, but a prolonged weakness in the rupee could lead to inflationary pressure with a lag,” Kapoor said. Currently, imported inflation is positive but small, a weaker rupee will add to it, but falling food inflation will be an important offset, added Nim.
No big solvency risk is seen with regard to external debt either, as it funds only a small part of the fiscal deficit. As such, the current account deficit remains manageable, and a weaker rupee should help correct to a limited extent the widened goods trade deficit.
“Over the past year, even as the dollar index surged by 9.8%, the rupee depreciated by a modest 3.68%, outperforming major currencies like the Japanese yen and Korean won, which fell by 9-12% during the same period,” said Amit Malviya, national convener of the IT cell of the Bharatiya Janata Party.
“Any defence of the currency does mean loss of forex reserves and this balance is what the RBI will be evaluating. Besides, given that all currencies are falling, the RBI may prefer to wait and watch, rather than sell dollars which may help only temporarily,” Madan Sabnavis, chief economist at Bank of Baroda, said. “The RBI should not burn its forex reserves to arrest the rupee’s decline any more than warranted by what the broader forex market moves,” said Nim.
For inflation, more than currency, the uncertainty comes from tariffs, noted Anitha Rangan, economist, Equirus Securities. “The rupee has also been on the overvalued zone. The 40-currency REER in November 2024 showed overvaluation by over 8%. This correction is, therefore, overdue to bring about export parity and competitiveness.”