Despite strong domestic macroeconomic indicators (8.2% GDP growth, near 1% inflation, lower crude prices, etc.), INR depreciated by more than 5% in 2025.

• Depreciation of the rupee occurs when its value declines relative to foreign currencies in the open market. 

Primary Factors Driving Depreciation

• Uncertainty over US-India Trade Deal: the imposition of steep US tariffs (up to 50%) on Indian goods challenges export competitiveness and dents investor confidence.
• Capital Outflows: Foreign Portfolio Investors (FPIs) have pulled significant funds, often treating India as a liquidity source to pursue opportunities elsewhere. 
• Widening Trade Deficit: driven by high demand for gold, electronics, and machinery, while exports to major markets, including the US, have softened. 
• Speculative Investment: continuous dollar demand from importers who are front-loading their dollar purchases on expectations of further rupee weakening.

Key Impacts on Indian Economy

• Negative Impact:
  • Imported Inflation: as India imports a large proportion of its crude oil (90%), edible oils, etc.
  • Increased Subsidy Burden: Higher import prices for fertilizers will swell the government's subsidy bill.
  • Higher Cost of Overseas Liabilities: Companies with dollar-denominated debt face higher repayment and interest servicing costs.
• Positive Impact:
  • Export Competitiveness: makes Indian exports cheaper and more competitive in the global market.
  • Remittances:  A weaker rupee could make remittances from overseas more attractive.