The Indian Rupee (INR) is the currency with which over 140 crore Indians buy or sell goods and services. The value of the INR will fluctuate, like most currencies. Sometimes it gains value; the vast majority of the time, it loses value, most notably when compared to other stronger currencies like the US dollar (USD). This is referred to as the devaluation of the INR.
So, in the last five years, the INR has devalued almost 14%, from approximately Rs 76.24 per dollar to Rs 86.75. But why does this happen? To understand this, we will discuss the following. The war started again when Israel attacked Iran on 13 June 2025, and a ceasefire was announced by Donald Trump on 24 June 2025.
During this crisis, INR against USD devalued by 1.6 percent to hit Rs 86.89 from Rs 85.53 and is currently trading at Rs 86. It is to be noted that, in times of crisis, INR gets devalued against any uncertainties.
When did the rupee get devalued because of such events?
- India–China War (1962) & Indo–Pakistan War (1965): This situation led to a balance of payments crisis worsened by heavy defense spending dictated by ramped-up foreign hostilities and a reduction in foreign aid. By 1966, the government had to devalue the rupee from ₹4.75 to ₹7.50 per USD.
- Gulf War (1990–91): The war resulted in a spike in global oil prices and a sudden decline in Gulf payments. India’s forex reserves fell dangerously low (adding to the current account deficit); the rupee was devalued by 18-19% in July 1991 to help manage the situation.
- Russia–Ukraine War (2022): The conflict caused oil prices to soar, and investors pulled out of EMs. Import bills shot up, and the dollar strengthened, causing the rupee to depreciate in value. This was the first time the INR has crossed ₹80 to the USD.
How has the rupee reacted while the RBI has been cutting rates continuously?
On February 7, 2025, the RBI made its first repo rate cut of the year, bringing it down to 6.25% (25 bps cut). This helped the rupee strengthen by 2.85%. The second cut came on April 9, when the rate was reduced further to 6.00% (25 bps cut). Later, on June 6, the RBI made another cut, bringing the repo rate to 5.50% (50 bps cut). However, after this third cut, the rupee weakened slightly by 0.29%.
Potential Reasons for INR Getting Devalued
Trade Deficit: India imports more than it exports. In FY25, India imported approximately $720 billion and exported $437 billion. This creates a trade deficit of approximately $283 billion, meaning India is required to pay more dollars to foreign accounts than it can earn in dollar currency, so it must sell INR to get dollars, which sells INR at a higher price as other owners of dollars want to buy USD (dollar), and the excess supply of INR pushes it down, or in this case, devalues the INR.
Oil Prices and Energy Needs: India is a significant importer of crude oil. When global oil prices go up, India requires more dollars to buy the same amount of oil, putting additional pressure on the rupee. Higher oil imports also correspondingly increase the trade deficit, which, again, causes significant devaluation.
Foreign Investments (FII and FDI): Foreign investors bring dollars into India through the stock market (FII) and businesses (FDI). When investors believe India is a safe investment, there is more dollar inflow, which strengthens the rupee.
However, when global conditions become risky (for example, in times of war, inflation, and recession fears), these investors take their money out and convert INR back to USD, causing an outflow of dollars, which weakens the rupee.
Global Economic Events: Developments such as the Russia-Ukraine war, US Fed interest rate increases, and China’s slowdown affect trade and investments at the global level. If the US raises interest rates, investors are inclined to take money out of India and put it into US assets, which have higher returns; as a result, dollars are moving out of India and into the US, weakening the INR.
Current Account Deficit (CAD): This occurs when a country’s expenditure of foreign currency exceeds its income. CAD consists of trade deficits and other payments, such as payments of interest to foreigners, services provided to tourists, remittances by fugitives, etc. A greater CAD indicates that India requires more dollars to pay for its expenditures. Thus, it aids the decline of the rupee.
Government borrowing and inflation: If the Indian government borrows too much from foreign lenders or if it decides to print more money to meet internal expenses, then rising inflation may occur. If the price increases in India, then the rupee may not be valued as highly.
Additionally, if the rate of inflation in India is higher than other competing currencies, then that does not contribute to the weakness of the rupee because it removes purchasing power from the rupee.
Forex Reserves: India holds foreign currencies, including US dollars, in its forex reserves, which are largely held by the RBI. During a depreciation of the rupee’s value, the RBI sells part of these reserves to limit the decline. In 2025, India’s forex reserves were about $698.95 billion. If these reserves decrease, defending the rupee becomes more difficult as it may devalue further.
Reserve Bank of India (RBI) Policies: The RBI is often a major player in managing the valuation of the rupee. It does so by buying and selling dollars from the exchange reserves it holds.
However, the rupee may continue to decline, especially if rupee reserves are dwindling, or if the RBI does not act. Of late, the RBI has been allowing a gradual decline of the rupee in order to protect reserves and to maintain competitiveness in its exports.
Rupee versus export advantage
Interestingly, the devaluation of the rupee (to some extent) benefits the exporters as they get more INR when they convert their dollar earnings. This improves sectors like IT, textiles, pharmaceuticals, etc. However, the other side of the coin is that imports will become more expensive, leading to implications for consumers and businesses that are reliant on imported goods.
The USD to INR rate has risen consistently for five years and has risen to Rs 85.49 per dollar until now. This shows an increase of 13.05 percent, or about Rs 9.87, from Rs 75.63 during the period.
The largest increase took place between late 2022 and 2023, which has also continued into 2025. From the chart, it is clear that the rupee has depreciated due to global and domestic macroeconomic factors.
Conclusion
The fall of the Indian rupee is not always a bad thing; however, a constant fall indicates underlying problems in the economy. It will increase the costs of imports, cause momentary hyperinflation, and diminish purchasing power. To rectify this situation, India must do the following: increase exports, attract stable foreign investment, lessen the trade deficit, and manage fiscal discipline.
In the long run, the level of stability attained will greatly depend on how India manages growth with global competitiveness. A strong, stable rupee is essential to establishing investor confidence, stabilizing the economy, and upgrading living standards for Indian citizens.
Written by Satyajeet Mukherjee
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