{"id":60255,"date":"2025-12-01T19:14:30","date_gmt":"2025-12-01T13:44:30","guid":{"rendered":"https:\/\/www.nextias.com\/ca\/?p=60255"},"modified":"2025-12-02T15:29:57","modified_gmt":"2025-12-02T09:59:57","slug":"rupee-depreciation","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/current-affairs\/01-12-2025\/rupee-depreciation","title":{"rendered":"Rupee\u2019s Depreciation:\u00a0Global Volatility &amp; Structural Concerns"},"content":{"rendered":"\n<p><strong>Syllabus: GS3\/Economy<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Context<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Recent rupee\u2019s depreciation against major currencies like the dollar, euro, and yen signals global volatility and deeper structural concerns.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>About Rupees Depreciation<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>It refers to the<strong> decline in the value of the Indian rupee<\/strong> relative to foreign currencies, particularly the US dollar.&nbsp;<\/li>\n\n\n\n<li>It means that more rupees are needed to buy a unit of foreign currency, when the rupee depreciates.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Key Drivers of Rupee Depreciation<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Trade Deficit:<\/strong> When imports exceed exports, demand for foreign currency rises, putting downward pressure on the rupee.<\/li>\n\n\n\n<li><strong>Capital Outflows:<\/strong> Foreign investors pulling money out of Indian markets reduce the supply of foreign currency, weakening the rupee.<\/li>\n\n\n\n<li><strong>Global Dollar Strength<\/strong>: A strong US dollar, often due to high interest rates in the US, can lead to depreciation of emerging market currencies like the rupee.<\/li>\n\n\n\n<li><strong>Inflation Differentials:<\/strong> Higher inflation in India compared to its trading partners can erode the rupee\u2019s purchasing power over time.<\/li>\n\n\n\n<li><strong>Geopolitical and Economic Uncertainty:<\/strong> Global crises or domestic instability can reduce investor confidence, leading to currency depreciation.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Reasons For Current Depreciation<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Nominal Depreciation: <\/strong>The rupee has weakened against most major currencies, including the <strong>Chinese yuan (11.66 to 12.63)<\/strong>. The NEER\u2019s fall below 85 reflects this broad-based depreciation.<\/li>\n\n\n\n<li><strong>Lower Domestic Inflation: <\/strong>India\u2019s <strong>CPI inflation<\/strong> in <strong>October 2025<\/strong> stood at <strong>0.25%<\/strong>, far below that of major economies like US &amp; Japan (3%); UK (3.6%); Euro Area (2.1%); Indonesia (2.9%); and Brazil (4.7%)\n<ul class=\"wp-block-list\">\n<li>The combination of <strong>nominal depreciation<\/strong> and <strong>low inflation<\/strong> has led to a <strong>decline in REER<\/strong>, implying that the <strong>rupee is now undervalued<\/strong> and Indian exports may gain price competitiveness.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Decline in NEER &amp; REER:<\/strong>\n<ul class=\"wp-block-list\">\n<li><strong>NEER<\/strong>: Dropped from <strong>90.75 (Jan 2025)<\/strong> to <strong>84.58 (Oct 2025)<\/strong> \u2014 a <strong>6.8% decline<\/strong> in just nine months.<\/li>\n\n\n\n<li><strong>REER<\/strong>: Fell sharply from its <strong>record high of 108.06 (Nov 2024)<\/strong> to <strong>97.47 (Oct 2025)<\/strong> \u2014 a <strong>9.8% correction<\/strong>, shifting the rupee from being <strong>overvalued to undervalued<\/strong>.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-full\"><img data-dominant-color=\"ededeb\" data-has-transparency=\"false\" style=\"--dominant-color: #ededeb;\" loading=\"lazy\" decoding=\"async\" width=\"596\" height=\"341\" src=\"https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2025\/12\/Reasons-For-Current-Depreciation.webp\" alt=\"\" class=\"not-transparent wp-image-60274\" srcset=\"https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2025\/12\/Reasons-For-Current-Depreciation.webp 596w, https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2025\/12\/Reasons-For-Current-Depreciation-300x172.webp 300w\" sizes=\"auto, (max-width: 596px) 100vw, 596px\" \/><\/figure>\n<\/div>\n\n\n<figure class=\"wp-block-table\"><table class=\"has-background\" style=\"background-color:#ebecf0\"><tbody><tr><td><strong>About NEER and REER<\/strong><br>&#8211; Economists look beyond bilateral exchange rates to two indices \u2014 <strong>Nominal Effective Exchange Rate (NEER)<\/strong> and <strong>Real Effective Exchange Rate (REER)<\/strong> to assess the rupee\u2019s real competitiveness.<br>1. <strong>NEER<\/strong>: Weighted average of the rupee\u2019s exchange rates against a <strong>40-currency basket<\/strong> (base year: 2015\u201316).<br>2. <strong>REER<\/strong>: NEER adjusted for <strong>inflation differentials<\/strong> between India and its trading partners.<br>&#8211; A fall in NEER or REER indicates a <strong>weaker rupee<\/strong>, while an increase shows appreciation.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Implications of a Weaker Rupee<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Inflationary Pressures: <\/strong>Imported goods, including electronics, fuel, and essential commodities, are becoming costlier, affecting household budgets.\n<ul class=\"wp-block-list\">\n<li>Since India imports over 80% of its oil needs, fuel prices rise, triggering a domino effect on transportation, food, and manufacturing costs, thereby stoking inflation.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Corporate Profitability: <\/strong>The rupee\u2019s depreciation is expected to erode India&#8217;s corporate sector\u2019s (India Inc) profits, particularly for companies with high import dependencies or foreign currency borrowings.<\/li>\n\n\n\n<li><strong>Trade Balance and Export Competitiveness: <\/strong>While a <strong>weaker rupee<\/strong> can <strong>boost export competitiveness<\/strong> by making Indian goods cheaper abroad, the benefit is <strong>often offset by global demand slowdowns or supply chain disruptions<\/strong>.\n<ul class=\"wp-block-list\">\n<li>Moreover, India\u2019s structural trade deficit, driven by high-value imports like oil and electronics, limits the positive impact of currency depreciation.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Capital Flows and Investor Sentiment:<\/strong> Currency volatility can deter foreign investors, especially in equity and debt markets.\n<ul class=\"wp-block-list\">\n<li>Capital outflows driven by global risk aversion and higher US interest rates have exacerbated the rupee\u2019s decline.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>IMF\u2019s Reclassification and RBI\u2019s Exchange Rate Policy<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>IMF, <\/strong>in its <strong>November 26, 2025<\/strong> report,<strong> reclassified India\u2019s exchange rate regime<\/strong> as a <strong>\u2018crawl-like arrangement\u2019<\/strong>, following its <strong>earlier shift from a \u2018floating\u2019 to \u2018stabilised\u2019 arrangement<\/strong> in <strong>November 2023<\/strong>.\n<ul class=\"wp-block-list\">\n<li>A <strong>crawl-like regime<\/strong> allows gradual adjustments in the currency\u2019s value within a <strong>2% band<\/strong> around a defined trend, providing flexibility while avoiding abrupt movements.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>RBI\u2019s Current Stance:<\/strong> RBI has adopted a <strong>more flexible approach<\/strong>, intervening only occasionally to smooth excessive volatility. It is driven by:\n<ul class=\"wp-block-list\">\n<li><strong>Easing inflation<\/strong>, reducing the need for a strong rupee.<\/li>\n\n\n\n<li>The need to <strong>preserve export competitiveness<\/strong>, particularly amid global trade tensions and shifting supply chains.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li>RBI has <strong>intervened in the forex market<\/strong><strong>to stabilize the rupee<\/strong>. It may impact:\n<ul class=\"wp-block-list\">\n<li><strong>Foreign Exchange Reserves:<\/strong> Continued intervention has led to a drawdown in forex reserves, limiting the RBI\u2019s ability to defend the rupee indefinitely.<\/li>\n\n\n\n<li><strong>Inflation Risks:<\/strong> A weaker rupee makes imports more expensive, potentially stoking inflation and complicating the RBI\u2019s monetary policy stance.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>What Lies Ahead?<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The rupee\u2019s <strong>REER<\/strong> may <strong>decline further<\/strong>, keeping it undervalued if the trend of <strong>gradual nominal depreciation<\/strong> and <strong>subdued inflation<\/strong> continues.\n<ul class=\"wp-block-list\">\n<li>Such a position could <strong>benefit exporters<\/strong> but may <strong>raise import costs<\/strong> over time if global inflation pressures resurface.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li>The current undervaluation may offer temporary benefits to trade with India\u2019s inflation under control and external competitiveness improving.\n<ul class=\"wp-block-list\">\n<li>However, sustaining stability will require careful balancing between <strong>currency flexibility, inflation control, and capital flow management<\/strong> in the months ahead.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n\n<p><a href=\"https:\/\/indianexpress.com\/article\/explained\/explained-economics\/how-the-rupees-fall-is-real-this-time-10395078\/\" target=\"_blank\" rel=\"noopener\">Source: IE<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p><strong>Context<\/strong><\/p>\n<li class=\"ms-5\">Recent rupee\u2019s depreciation against major currencies like the dollar, euro, and yen signals global volatility and deeper structural concerns.<\/li>\n<p><\/p>\n<p><strong>About Rupees Depreciation<\/strong><\/p>\n<li class=\"ms-5\">It refers to the decline in the value of the Indian rupee relative to foreign currencies, particularly the US dollar.\u00a0<\/li>\n<li class=\"ms-5\">It means that more rupees are needed to buy a unit of foreign currency, when the rupee depreciates.<\/li>\n<p><a href=\"https:\/\/www.nextias.com\/ca\/current-affairs\/01-12-2025\/rupee-depreciation\" class=\"btn btn-primary btn-sm float-end\">Read\u00a0More<\/a><\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-60255","post","type-post","status-publish","format-standard","hentry","category-current-affairs"],"acf":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/60255","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=60255"}],"version-history":[{"count":5,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/60255\/revisions"}],"predecessor-version":[{"id":60301,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/60255\/revisions\/60301"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=60255"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=60255"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=60255"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}