Persistent high inflation, slowing growth, steady capital outflows, falling foreign exchange reserves, and a widening trade deficit are among the key reasons driving the rupee’s decline.
Published Jan 14, 2025 | 9:00 AM ⚊ Updated Jan 14, 2025 | 2:54 PM
In the past five years alone, the rupee has lost over 22 percent of its value against the dollar. (iStock)
The Indian rupee hit a record low of ₹86.43 per dollar on Monday, 13 January and slipped further to ₹86.5 on Tuesday. The decline is part of a broader, steady weakening of the currency against the dollar over the last decade. In the past five years alone, the rupee has lost over 22 percent of its value against the dollar, according to data from the Reserve Bank of India’s (RBI) Reference Rate Archive.
In January 2020, the rupee traded at ₹70.85 per dollar and has depreciated year by year since. It stood at ₹73.17 in 2021, ₹74.50 in 2022, ₹81.30 in 2023, and ₹82.88 in 2024, based on data for the same period.
Alleged economic mismanagement, slowing growth, steady capital outflows, falling foreign exchange reserves, and a widening trade deficit are among the key reasons driving the rupee’s decline.
Persistent inflation is one of the key drivers behind rupee’s erosion in value. Similarly, India’s reliance on imports, particularly for crude oil, has widened its trade deficit, putting additional pressure on the currency.
Meanwhile, over the last few years, foreign investors have pulled billions out of Indian markets, largely due to a loss of confidence in the Indian economy.
While India’s stagnating economic growth plays a significant role in the rupee’s decline, external factors beyond government control have also contributed.
The rupee also weakens when the dollar strengthens, which can happen due to various factors such as the US Federal Reserve raising interest rates or better-than-expected performance of the US job market.
For instance, in December 2024, the US reported stronger-than-expected job growth, making the dollar more attractive. In January 2025 alone, foreign portfolio investors withdrew over $4 billion from Indian markets, much of this driven by global uncertainties and rising US bond yields.
Global events, particularly conflicts such as the Russia-Ukraine war and Israel’s offensive in Gaza, as well as economic instability in major economies like the UK and Germany, have also driven investors to prioritise the dollar, which is often seen as rock solid and a safe haven for parking assets at times of uncertainty.
External Affairs Minister S Jaishankar backtracked on the proposal to trade with regional currencies to reduce reliance on the US dollar. (Wikimedia Commons)
Given the unequal relationship that most currencies around the world have with the US dollar due to its dominant monopoly in the global financial and commodities markets, several groups of economies have tried to move away from reliance on the dollar.
India’s latest half-hearted attempt came at the 2024 BRICS summit in Kazan, Russia, in October. Prime Minister Narendra Modi advocated for increasing trade among member states in local currencies alongside broader digital payments collaboration to offset some of the disadvantages of relying on the dollar.
But soon after, when US President-elect Donald Trump threatened sanctions of up to 100 percent on trade with BRICS member states if they pushed for trading in a common currency that wasn’t the dollar, Indian External Affairs Minister S Jaishankar quickly backtracked and said that India had “no intention of undermining the US dollar’s dominance.”
The RBI soon followed with its own statement, saying that it had no de-dollarisation strategy in place.
