The Currency Seesaw: A Falling Rupee Isn't All Bad

Recently a lot of headlines have been occupied by the depreciating value of the Indian Rupee (INR), when it hit ‘record low’ against the US dollar (USD) at 91, falling at a 6% rate in the year 2025. Normally when a layman picks up such news, there is an immediate negative connotation that gets associated with it. But going into the economics of this, strips away this assumption. So, to break the illusion let us take a deeper dive into the phenomenon of a declining currency.  

What is meant by valuation of currency?

To put simply, the valuation of rupee or the exchange rate of rupee means the amount of Indian rupee that is required to buy an American dollar or any other currency per se.  So, if the rupee stands at 90, this implies that to exchange or buy $1 it will take ₹90. And to further add, the more the amount of rupee required increases, the more it weakens or vice versa.  

Another fundamental of economics is the market forces of demand and supply and how it influences the price of a commodity. The more something is in demand, the higher its price seems to get. And the more supply procured, it dulls the price consequently. So, what we are seeing in the currency market at the moment is the increased demand of dollar leading to strengthening of USD while the rupee weakens due to its presence in an abundant amount.  

Calculating exchange rates is not as simple as it seems. In the actual and dynamic market there are some complexities that have to be ruled out in order to obtain a result that closely resembles the real figure. In order to evaluate INR, it would be unwise to project and contrast it to just a single currency. The approach that is followed in this matter is somewhat similar to the one applied while deriving Consumer Price Index (CPI). This is where REER and NEER comes in the picture. Just like CPI, a basket is considered in which different foreign currencies are placed, and results are taken in reference to a base year.  

Nominal Effective Exchange rate (NEER) is the weighted average of rupee’s exchange rate against 40 key trading partners. It paints a more accurate landscape to compare rupee’s position in the global competitive market. While NEER after being adjusted for inflation gives us Real Effective Exchange Rate (REER), reflecting on the purchasing power of rupee. It is an important component for assessing trade competitiveness. On a scale of 100, both NEER and REER if below 100 implies that currency is undervalued and weak. While above 100 reflects currency’s overvaluation and strengthening.     

The rupee’s depreciation can be seen not only against USD but also other major currencies as well. NEER has fallen 32% in the past decade and shows an 8% decline alone in 2025 up till October 2025. REER too has seen a sharp decline slashing by nearly 9.9%.  

Is a weakened currency a disadvantage?

People would believe it to be true, but in reality, it is not all bad. Chinese for a long time have been accused of currency manipulation by other countries. A globally undervalued Chinese Yuan is a heaven for domestic exporters in China, which has been a sour topic internationally. China deliberately keeps its currency devalued in order to promote exports. Devaluations and depreciation differ on the ground of Governmental interventions. The former is an intended decision taken by authorities while the latter is deemed by market forces. There are both positive as well as negative repercussions of a weak currency. 

Positive Aspects: 

1. Exports-  

Weak domestic currency implicates increased exports as the exporters earn more. Most of them are paid in USD and if it gets stronger it means more pecuniary procurement and encourages exports. Many sectors such as pharmaceuticals, I.T., textiles and merchandise, energy etc. It ultimately improves trade competitiveness globally by making Indian exporters more attractive to the world.  

2. Remittance- 

India is the top country to receive money from foreign countries which make remittances a very important component in its economics. If the domestic currency weakens it means the remittance value increases. Healthy inflow of it is very beneficial to India as was seen when the Vajpayee government bought in the Liberalised Remittance Scheme(LRS) which had a positive impact on rupee’s position for the years after that. 

3. Domestic production- 

With a weakened rupee, imports are costlier which means choices get cut and this might have a positive impact on domestic production which gets a push for local manufacturing. 

4. Tourism- 

For foreigners it becomes cheaper to visit India as it stands weak which helps with the revenue and local businesses and economy at large. 

Negative Aspects: 

1. Imports- 

For a country like India which is heavily reliant on imports especially when we bring oil in the scenario, it is a big disadvantage as it makes overall imports costlier and expensive. The increased cost sends ripple effects down in transportation and production costs. Crude oil, natural gas, energy all gets affected by this and India is dependent on foreign imports for such items.       

2. Inflation- 

With costlier imports comes the risk of imported inflation which makes products more expensive for customers to buy. Food, petrol, fertiliser and other daily essentials get an increment in price causing inflation. 

3. Loans and borrowing- 

Companies, corporations, or other entities who are under foreign debt face the problem of a more expensive loan, meaning now they would require more rupee to repay the loaned dollar, which is cheaper on paper but in reality, has become costlier.  

4. Foreign investment- 

Foreign direct investment gets sucked out of the country as investors do not seem to procure more profit because of the adverse currency position. The outflow of equity and debt requires conversion of rupee back into dollars increasing the demand for dollar and the supply of rupee in the Indian market pushing it further down.  

5. Current account deficit- 

As imports become costlier it widens the trade deficit meaning the increased negative difference between the export and import of a country. Usually, the CAD is covered by the capital account part of Balance of Payment but sometimes when a deficit in the current account cannot be covered by the capital one, it can lead to a crisis. So, a sufficient balance must be maintained.  

Thus, it is important to note that a strong currency may not always resonate with a strong economy. With dollarisation the overvalued dollar has been all prevalent throughout the globe. But in recent times attempts have been made in order to weaken the dollar. America desires to bring back production in the country which would be easier with a rather soft dollar and not to forget that it would aid the government in the lowering of bond yields as well. While rupee has consistently fallen for a long time, it is predictable that it may fall even further. What should be kept in mind is that effective planning and measures are taken to keep the situation in control.  

Exchange Rate System- 

The Bretton Woods system rendered us with other currencies being pegged against the American Dollar which was itself pegged against gold. But following the Triffin Dilemma, in 1970s Nixon discarded this and moved towards a flexible Floating system, allowing the dollar to move freely in the market in respect to the prevailing conditions. India on the other hand has adopted a Managed Floating/ Dirty Floating system which allows the central bank to intervene in dire times and otherwise rupee is allowed to float in the market on its own. RBI is the central bank responsible to function as a saviour in situations with extreme unprecedented volatility. IMF has described India’s system as a ‘crawl like arrangement’ which reflects on RBI’s reformative and managed nature of problem solving. While allowing rupee to free float and intervening when required to curb volatility, taking a break from the stabilised arrangement of the past.  

Current circumstances do put the rupee on the spot as compared to other currencies. The delayed trade deal between the U.S. and India hangs on its head promulgating uncertainty. The tariffs with additional punitive tariffs by America have worsened India’s trade competitiveness in the global arena. And the persistent capital outflow arising from either slim profit margins in the Indian market or emergence of a relatively cheaper market has also pressured rupee in recent times. There has been an increased import of gold and silver items as it has attained popularity among investors who have procured both physical as well as ETFs, further widening the trade gap.  

Indian merchandise exports fell by 11.8% in October 2025 while imports surged 16.6%. With additional pressure from the U.S. over equalising the trade deficit and also regarding the purchase of Russian oil, there is a high possibility of rupee slugging further which is no different from the past trend.  

Yes, the rupee has crossed the psychological bar of 90 and recorded a new low, but following the pattern, every low rupee hits is a historic low. India follows its own economic logic which has favoured it precedingly. There exists a currency nationalism among people in India which makes negative sentiments understandable as sometimes these issues are even politicised on partisan grounds. But the market does not function on the basis of such emotions, at least the ones separated from the fundamentals of economics. RBI as the protector has many options in its pocket to handle the situation such as finding import substitutions, currency swap agreement, trade payment diversification etc. The silver lining is that, India’s economy is robust and resilient with a war chest of foreign reserves which makes this situation a lot less grave. In journalistic jargon, this story isn’t the big scoop it's being sold as.

References:

 Understanding the dynamics of India’s rupee. (2025, December 18). https://www.kotakmf.com/Information/blogs/understanding-the-dynamics-of-india-rupee_ (Kotak Mutual Fund)

Why is the Indian Rupee falling against the US dollar? (2025, September 18). Bajaj Finserv. https://www.bajajfinserv.in/usd-vs-inr-why-indian-rupee-falling-against-us-dollar (https://www.bajajfinserv.in)

Reserve Bank of India. (n.d.). Reference rate archive. Reserve Bank of India. Retrieved December 25, 2025, from https://www.rbi.org.in/scripts/referenceratearchive.aspx (rbi.org.in)