Editorial 2 : Rupee Depreciation: Challenges and Opportunities
Context:
Rupee depreciation, though significant, presents opportunities to boost India’s export competitiveness and manage trade imbalances.
Introduction:
The Indian rupee has depreciated significantly over the past year, falling 5.6% against the US dollar, 9.4% against the euro, and 14.3% against the British pound. This decline has also translated into a lower Real Effective Exchange Rate (REER), moving India’s currency from a highly overvalued position to being slightly undervalued. This shift has important implications for foreign trade, external competitiveness, and macroeconomic stability.
Key Issues:
- Rupee Depreciation and Trade Balance:
- India’s merchandise trade deficit reached a record $41.7 billion in October 2025, highlighting the need for adjustment in the external sector.
- A slightly undervalued rupee can improve export competitiveness, reduce import dependence, and mitigate the risk of cheap Chinese imports.
- Exchange rate flexibility serves as an effective shock absorber, offering a more market-driven solution to trade imbalances than traditional protectionist measures such as tariffs or export bans.
- Policy Shift by the Reserve Bank of India (RBI):
- The RBI’s adoption of a flexible exchange rate policy under the current governor marks a departure from previous overvaluation strategies.
- The calibrated depreciation is supported by low domestic inflation and global deflationary pressures, reducing fears of imported inflation.
- External shocks, including US tariffs and the prospect of a China Shock 2.0, have necessitated a responsive and adaptive exchange rate strategy.
- Macroeconomic Implications:
- An undervalued rupee enhances India’s ability to correct trade deficits and sustain current account stability.
- It incentivizes domestic industry to compete internationally, aligning with the objectives of Make in India and export-led growth strategies.
- However, persistent depreciation could increase import costs, particularly for energy and capital goods, and requires careful monitoring to balance growth and inflation.
Way Forward:
- India should maintain a market-determined and flexible exchange rate regime while strengthening foreign exchange reserves to absorb external shocks.
- Complementary measures, such as boosting manufacturing, improving infrastructure, and enhancing export diversification, will ensure long-term competitiveness.
- Coordination between monetary and fiscal policy is crucial to manage inflationary pressures while promoting growth and external stability.
- Policymakers must continue leveraging global trade dynamics strategically, ensuring India capitalizes on geopolitical shifts and supply chain realignments.
Conclusion:
The current rupee depreciation, rather than being a cause for alarm, presents an opportunity to enhance India’s export competitiveness and economic resilience. A flexible exchange rate policy, supported by structural reforms and strategic trade policies, can serve as a critical tool for sustaining macroeconomic stability, trade balance, and long-term growth.