Indian Rupee Falls Sharply – Causes and Impact

The Indian rupee has recently experienced significant volatility, witnessing its sharpest single-day fall in over three weeks. On February 25, 2025, the rupee depreciated by 51 paise, closing at 87.23 against the U.S. dollar, compared to the previous close of 86.72. This decline has raised concerns among market analysts, businesses, and policymakers.

In this blog, we will explore the factors contributing to this fall, the Reserve Bank of India’s (RBI) response, and the broader implications for the Indian economy.

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Reasons Behind the Rupee’s Sharp Depreciation

The steep decline in the rupee’s value can be attributed to multiple domestic and global economic factors:

1. Month-End Dollar Demand

At the end of each month, Indian importers—especially oil marketing companies and multinational corporations—buy large amounts of U.S. dollars to meet their payment obligations. This increased demand for dollars exerts downward pressure on the rupee.

2. Non-Deliverable Forward (NDF) Contracts Expiry

The expiration of NDF contracts led to additional dollar buying, further depleting the rupee’s strength. NDF markets, where traders bet on the future value of the rupee, saw a spike in demand for dollars, impacting the currency’s stability.

3. Global Trade Tensions

Recently, U.S. President Donald Trump announced new tariffs on imports from Canada and Mexico. These developments triggered global economic uncertainty, impacting emerging market currencies like the Indian rupee. Investors, fearing trade disruptions, shifted funds to safer assets like the U.S. dollar, pushing the rupee lower.

4. Foreign Portfolio Investment (FPI) Outflows

February 2025 witnessed significant capital outflows from Indian equities, with FPIs withdrawing nearly $3 billion from the stock market. This outflow further weakened the rupee, as investors converted their holdings into dollars before exiting Indian markets.

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RBI’s Intervention to Stabilize the Rupee

In response to the rupee’s depreciation, the Reserve Bank of India (RBI) actively intervened to prevent excessive volatility.

1. Heavy Dollar Selling

The RBI reportedly sold between $4 billion and $7 billion in the forex market to stabilize the rupee. This marked one of the largest single-day interventions by the central bank.

2. Announcing a $10 Billion Dollar-Rupee Swap Auction

To improve dollar liquidity in the market, the RBI announced a $10 billion three-year dollar-rupee swap auction. This move aimed to ease cash shortages and support the rupee’s stability by ensuring sufficient dollar supply.

3. Monitoring Inflation and Policy Adjustments

The RBI is also keeping a close watch on inflationary trends and global economic conditions. If the rupee’s depreciation persists, it might take further monetary policy actions, such as interest rate adjustments, to attract foreign investment.

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Impact of a Weaker Rupee on the Indian Economy

A depreciating rupee affects various sectors of the economy, including trade, inflation, and foreign investments.

1. Higher Inflation Due to Expensive Imports

India is a net importer, with crude oil and electronics being major components of imports. A weaker rupee means higher costs for imported goods, leading to increased inflation. Consumers may soon feel the impact in the form of higher fuel, food, and consumer electronics prices.

2. Impact on Indian Businesses

• Exporters Benefit: A weaker rupee makes Indian exports cheaper and more competitive in global markets, benefiting industries like IT services, textiles, and pharmaceuticals.
• Import-Dependent Sectors Suffer: Sectors that rely on imported raw materials, such as automobiles and electronics, may see increased costs, affecting profitability.

3. Costlier Foreign Education and Travel

With a weaker rupee, students studying abroad will have to spend more rupees for tuition fees and living expenses. Additionally, international travel will become more expensive, affecting tourism.

4. Capital Outflows and Market Volatility

If the rupee continues to weaken, more foreign investors might exit Indian markets, fearing further depreciation. This could result in stock market volatility, affecting investor confidence.

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Future Outlook: What Lies Ahead for the Rupee?

Market analysts expect continued volatility for the rupee in the short term. The currency’s trajectory will depend on:
✔️ The RBI’s future interventions
✔️ Global trade policies and tariff developments
✔️ Foreign investment trends
✔️ Domestic inflation and fiscal policies

While the RBI is likely to continue intervening, the rupee’s long-term stability will depend on India’s economic fundamentals, trade balance, and global market sentiment.

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Conclusion

The Indian rupee’s recent depreciation highlights the complex interplay of global economic factors, foreign investments, and domestic financial policies. While short-term pressures remain, a stable macroeconomic environment and prudent monetary policies will be key in maintaining the rupee’s long-term stability.

Key Takeaways:
🔹 The rupee fell 51 paise to 87.23 against the U.S. dollar on February 25, 2025.
🔹 Major factors include month-end dollar demand, foreign outflows, and global trade tensions.
🔹 The RBI intervened by selling $4-$7 billion and announcing a $10 billion swap auction.
🔹 A weaker rupee raises inflation risks, affects businesses, and impacts foreign education and travel costs.
🔹 The rupee’s future will depend on RBI’s measures, global trade policies, and market conditions.

As the Indian economy navigates these challenges, policymakers, investors, and businesses must closely monitor developments to mitigate risks and leverage opportunities in this evolving economic landscape. 🚀