IAS/UPSC Coaching Institute  

27 Nov 2025 : Limited room

 Editorial 1: Limited room

Context

India must cut its heavy reliance on oil imports to ensure greater rupee stability.

 

 

Introduction

The recent 7% rupee depreciation reflects a mix of global and domestic pressures similar to past episodes. Despite strong forex reserves, sharp shifts in oil imports, and a widening current-account deficit, volatility persists. With inflation at record lows, the RBI can manage turbulence, but lasting stability demands strategic reforms in energy security and trade policy.

 

Rupee Depreciation: Context and Comparison

  • The rupee has depreciated about 7% from late November 2024 to now, sliding from ₹83.4/$ to around ₹89.2/$.
  • This decline is not unprecedented; in 2018, the rupee weakened by 11–12%.
  • The comparison matters because the political and trade environment today resembles that period.

 

Global Backdrop and Historical Echoes

  • In 2018, under U.S. President Donald Trump’s first term:
    • Strong U.S. dollar,
    • Rising U.S. interest rates,
    • Trade tensionsall pressured emerging-market currencies, including the rupee.
  • The RBI introduced its first longer-term currency swap as a liquidity tool.
    • 2019: A $5-billion, three-year dollar/rupee swap completed.
    • Feb 2025: A $10-billion buy-sell swap conducted to infuse long-term rupee liquidity during global stress.

 

Role of Currency Swaps

  • Central banks use such swaps to:
    • Supply liquidity to banks,
    • Strengthen forex reserves,
    • Prevent disorderly depreciation when the dollar surges or capital flows reverse.
  • Under India’s managed-float regime, the RBI cannot fix the exchange rate; it can only smooth volatility.

 

Domestic and External Pressure Points

  • The recent steep rupee fall is shaped by:
    • Widening current-account deficit.
    • Higher bullion imports as a safe-haven hedge.
    • Exporters facing high U.S. tariffs, pushing them to defend competitiveness.
  • From November to now, the RBI sold about $50 billion in forex to stabilise the rupee, yet depreciation continued.

 

Strengths and Stabilising Factors

  • Forex reserves remain strong: approximately $693 billion.
  • Retail inflation has dropped sharply: CPI inflation at 0.25% in Oct 2025, far below the 2%–6% target band.
  • This low inflation gives the RBI room to tolerate modest depreciation without aggressive rate hikes.

 

Oil Dependence and Inflation Risk

  • As India shifts from cheaper Russian crude to costlier U.S. imports, the weaker rupee may raise oil-driven inflation.
  • With crude comprising over 20% of imports in FY25, this creates an inflationary risk.

 

Policy Priorities Beyond Monetary Stabilisation

  • Monetary tools alone cannot fix structural vulnerabilities.
  • India must urgently address its oil dependence, especially by:
    • Accelerating transport electrification,
    • Improving energy diversification.

 

Trade Policy Imperatives

  • Trade strategy must be coherent, not a patchwork of bilateral deals.
  • Existing agreements with Japan, UAE, and ASEAN have worsened India’s trade balance.
  • A rethought trade framework is essential for long-term macro stability.

 

Conclusion

While the RBI can smooth volatility, India’s currency resilience ultimately depends on tackling structural weaknesses. Reducing oil dependence, accelerating electrification, and crafting a coherent trade strategy are essential to shield the economy from external shocks. With strong reserves and low inflation, India has the space to act, but must pursue these reforms with clarity, urgency, and long-term purpose.