Context & The Gist
The Indian Rupee has depreciated by approximately 7% since late November 2024, reaching ₹89.2 per dollar, mirroring a similar trend observed in 2018. The article argues that while the RBI employs standard tools like currency swaps and forex sales to manage volatility, a sustainable solution lies in reducing India’s substantial dependence on oil imports, a key vulnerability in the face of global macroeconomic pressures.
Key Arguments & Nuances
- External Pressures:
The rupee’s decline is attributed to a widening current account deficit, increased bullion imports as a hedge against uncertainty, and competitive pressures faced by exporters due to high U.S. trade tariffs. These factors are compounded by global dollar strength and rising U.S. interest rates.
- RBI’s Role & Limitations:
The Reserve Bank of India (RBI) is actively intervening in the forex market, having sold approximately $50 billion to stabilize the rupee. However, under a ‘floating-but-managed’ exchange rate regime, the RBI’s mandate is limited to smoothing volatility, not fixing the exchange rate.
- Inflationary Concerns:
While domestic retail inflation is currently low (0.25% in October 2025), the shift from cheaper Russian crude to more expensive U.S. oil, coupled with rupee depreciation, poses an upward risk to inflation.
- Trade Policy Critique:
The article criticizes India’s focus on bilateral trade deals, arguing they haven’t effectively diversified trade routes and have, in some cases, tilted the trade balance against India (e.g., agreements with Japan, UAE, and ASEAN).
UPSC Syllabus Relevance
- Indian Economy (GS Paper III): Exchange Rate, Balance of Payments, Monetary Policy, Inflation Control.
- International Relations (GS Paper II): Impact of global economic trends on the Indian economy, trade relations with major economies.
- Government Policies & Interventions (GS Paper II): Role of the RBI in managing the economy, government’s strategies for reducing oil import dependence.
Prelims Data Bank
- RBI Currency Swaps: Used to infuse long-term rupee liquidity and manage forex reserves. Examples: $5 billion swap in 2019, $10 billion buy-sell swap in February 2025.
- Current Account Deficit: A key indicator of external vulnerability.
- Headline CPI Inflation: 0.25% in October 2025 (as per the article).
- Foreign Exchange Reserves: Approximately $693 billion (as of November 2025).
Mains Critical Analysis
The depreciation of the Indian Rupee presents a complex challenge requiring a multifaceted approach. A PESTLE analysis reveals the following:
- Political: Government’s trade policy and its impact on trade balance.
- Economic: Global macroeconomic conditions, oil prices, inflation, and the current account deficit.
- Social: Impact of inflation on consumer spending and overall economic well-being.
- Technological: Potential for technological advancements in alternative energy sources to reduce oil dependence.
- Legal: Regulatory framework governing forex reserves and exchange rate management.
- Environmental: Transition to sustainable energy sources to reduce reliance on fossil fuels.
The core issue is India’s persistent vulnerability to oil price shocks. While the RBI can manage short-term volatility, a long-term solution necessitates a fundamental shift in energy policy. The critical gap lies in the slow pace of diversification of energy sources and the limited success of bilateral trade agreements in addressing trade imbalances. The implications include sustained inflationary pressures, a widening current account deficit, and potential constraints on economic growth.
Value Addition
- NITI Aayog’s ‘Strategy for New India @ 2022’ emphasized the need for energy security and diversification of energy sources.
- SC Judgement on Forex Reserves: The Supreme Court has upheld the RBI’s autonomy in managing forex reserves and exchange rate policy.
- Best Practice: Norway’s Government Pension Fund Global, built on oil revenues, demonstrates effective management of resource wealth and diversification of investments.
- Quote: “A country’s exchange rate is essentially a reflection of its economic fundamentals.” – Milton Friedman
The Way Forward
- Immediate Measure: Continue strategic release of forex reserves to manage volatility, coupled with calibrated monetary policy adjustments to control inflation.
- Long-term Reform: Prioritize faster electrification of transportation, invest heavily in renewable energy sources, and renegotiate trade agreements to ensure a more balanced trade relationship.