The Indian Rupee is expected to fall to ₹95 from ₹90 against the US dollar. This sharp movement has raised an important question across markets and households alike: what is the reason and why is the Indian rupee falling so much? From higher import costs to foreign investment outflows, currency movement affects everyone. To understand the situation clearly, it is important to first grasp what currency depreciation means and how exchange rate variations are calculated, before looking at the main reasons behind the rupee’s decline.
When a currency’s value falls against other currencies, it is called currency depreciation. Simply put, if more rupees are required to buy one US dollar than before, the rupee has depreciated. To understand this concept in detail, read our blog :- What is currency appreciation and depriciation?
How Is Currency Variation Calculated?
Currency value does not change randomly. There are usually three broad approaches considered when determining how a currency moves:
- Free-floating system
In this system, the currency’s value rises or falls purely based on market demand and supply. If foreign investors buy more Indian assets, demand for the rupee increases and it strengthens. If they sell and move money out, the rupee weakens. - Fixed or pegged system
Here, the currency is tied to another currency (like the US dollar). Even if market forces change, the central bank intervenes heavily to maintain the exchange rate. - Managed float (a mixture of both)
India follows a managed floating exchange rate system, which is a mix of the two approaches. The rupee is largely market-driven, but the Reserve Bank of India (RBI) steps in when volatility becomes excessive.
This mix allows flexibility while preventing extreme or sudden shocks to the economy.
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Key Reasons Why the Indian Rupee Is Falling
Now that the basics are clear, let’s look at the main reasons behind the recent weakness of the rupee.
1. Strong US Dollar
The US dollar has been strengthening globally due to higher interest rates and a resilient US economy. When the dollar strengthens, most emerging market currencies, including the Indian rupee, come under pressure.
2. Foreign Investor Outflows
Foreign institutional investors (FIIs) have been pulling money out of Indian equities and debt markets. When foreign investors sell Indian assets, they convert rupees into dollars, increasing dollar demand and weakening the rupee.
3. Rising Crude Oil Prices
India imports a large portion of its crude oil. Higher oil prices mean more dollars are needed for imports, increasing demand for foreign currency and putting pressure on the rupee.
4. Global Trade and Geopolitical Uncertainty
Global trade tensions, geopolitical conflicts, and uncertainty in international markets make investors cautious. During such times, capital tends to move towards safer assets like the US dollar, leading to rupee depreciation.
5. Inflation Differentials
If inflation in India is higher than in developed economies, the purchasing power of the rupee declines. Over time, this difference contributes to currency weakness.
6. Current Account Deficit
When a country imports more than it exports, it runs a current account deficit. A higher deficit means more dollars are needed than earned, which can weaken the domestic currency.
Summary of Factors Affecting the Rupee
| Factor | Impact on Rupee |
|---|---|
| Strong US dollar | Weakens rupee |
| Foreign investor outflows | Increases dollar demand |
| High crude oil prices | Raises import bill |
| Global uncertainty | Pushes money to safe assets |
| Higher inflation | Reduces currency value |
| Current account deficit | Puts pressure on exchange rate |
Role of the RBI
The RBI closely monitors currency movements. While it does not target a specific exchange rate, it intervenes to reduce excessive volatility. This may include selling dollars from its reserves or adjusting liquidity conditions. However, the RBI typically allows gradual depreciation if it reflects broader economic fundamentals.
What Does a Falling Rupee Mean for India?
A weaker rupee has mixed effects:
- Exports become more competitive, benefiting exporters
- Imports become expensive, increasing inflation
- Foreign travel and education cost more
- Companies with foreign loans face higher repayment costs
This is why currency depreciation is carefully watched by policymakers.
Final Thoughts
Understanding Why is the indian rupee falling? requires looking at both global and domestic factors. A strong US dollar, foreign capital outflows, rising oil prices, and global uncertainty are all contributing to the rupee’s weakness. Since India follows a managed floating system, some movement is natural, but sharp declines draw attention.
