{"id":103895,"date":"2026-05-18T10:53:00","date_gmt":"2026-05-18T05:23:00","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=103895"},"modified":"2026-05-18T16:58:35","modified_gmt":"2026-05-18T11:28:35","slug":"currency-depreciation-explained","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/currency-depreciation-explained\/","title":{"rendered":"Currency Depreciation Amid the Crisis in West Asia &#8211; Explained"},"content":{"rendered":"<h2 style=\"text-align: justify;\"><strong>Currency Depreciation Latest News<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Indian rupee has breached the 96-per-dollar mark, hitting a record low amid the West Asia crisis, with policymakers concerned about the possibility of it crossing the psychological barrier of 100.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Understanding Currency Depreciation<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Currency depreciation refers to the decline in the value of a country&#8217;s currency relative to another currency, typically the US dollar in India&#8217;s case.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">It occurs due to market forces such as demand and supply of foreign exchange, capital flows, trade balances, and interest rate differentials.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A depreciating currency makes imports costlier and exports cheaper, affecting inflation, trade balance, and overall economic stability.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">For a heavily import-dependent country like India, especially for crude oil and gold, a weakening rupee has significant macroeconomic implications.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Understanding Balance of Payments<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The <a href=\"https:\/\/vajiramandravi.com\/current-affairs\/balance-of-payments\/\" target=\"_blank\">Balance of Payments<\/a> (BoP) is a comprehensive record of all economic transactions between residents of a country and the rest of the world over a specific period. It comprises two main accounts:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Current Account<\/b><span style=\"font-weight: 400;\">: Records trade in goods and services, primary income, and secondary income (remittances).<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Capital and Financial Account<\/b><span style=\"font-weight: 400;\">: Records foreign investments, loans, and other capital flows.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A BoP surplus occurs when foreign fund inflows exceed the trade deficit, strengthening the rupee. A BoP deficit weakens the currency.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Historical Context: The Phase of Artificial Stabilisation<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li><span style=\"font-weight: 400;\">The current rupee crisis must be understood in the context of the Reserve Bank of India&#8217;s (RBI) intervention patterns over the past three years.<\/span><\/li>\n<li aria-level=\"1\"><b>Rupee Movement Timeline<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">September 2022: Rupee breached the 81-per-dollar mark for the first time.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">2023-2024: Rupee moved in a narrow range of 81-83 per dollar for nearly two years.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">October 2024: Broke past 84 per dollar.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">December 2024: Crossed 85 per dollar.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Since January 2025: Rupee has fallen by 11%.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">May 2026: Breached 96 per dollar, hitting a record low.<\/span><\/li>\n<\/ul>\n<\/li>\n<li aria-level=\"1\"><b>The Stabilisation Years<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">According to policymakers, the rupee was artificially held back between 2023 and 2024 through significant RBI interventions in the foreign exchange market. Key data points include:<\/span><\/li>\n<li><span style=\"font-weight: 400;\">2022-23: BoP deficit of $9 billion; rupee weakened by 7.6%; RBI sold a record $213 billion; forex reserves declined by $29 billion.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">2023-24: BoP surplus of $64 billion; RBI bought $41 billion net; forex reserves increased by $68 billion; rupee declined only by 1.4%.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">2024-25: BoP deficit of $5 billion; rupee fell by 2.5%; RBI&#8217;s gross dollar sales jumped to a record $399 billion.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The RBI&#8217;s stated policy is that it does not target any specific exchange rate level and only intervenes to prevent excessive volatility. However, the data suggests significant interventions were made to maintain rupee stability.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Current Crisis: West Asia Conflict and Capital Outflows<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li><span style=\"font-weight: 400;\">The ongoing West Asia crisis has put significant pressure on India&#8217;s capital account, leading to substantial foreign capital outflows.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Since the war began in late February 2026, the rupee has fallen by 5.2% against the dollar.<\/span><\/li>\n<li aria-level=\"1\"><b>Key Factors Driving Depreciation<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Rising Crude Oil Prices: Higher import bills widen the current account deficit.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Foreign Institutional Investor (FII) Outflows: Sustained capital outflows of \u20b91.97 lakh crore in the January-May period.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Global Uncertainty: Geopolitical tensions affecting investor sentiment.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Pent-up Depreciation: Markets pricing in depreciation that may have occurred during the earlier phase of artificial stability.<\/span><\/li>\n<\/ul>\n<\/li>\n<li aria-level=\"1\"><b>Why Past Stabilisation Matters Now<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Policymakers are increasingly recognising that the prolonged stability of the rupee at 82-83 per dollar during 2023 and 2024 may have created pent-up depreciation pressure. According to internal deliberations:<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The forex market is now pricing in the depreciation that may have occurred earlier.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The current fall appears steeper because of the earlier artificial stability.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Effects of long, artificial stabilisation are being felt now.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The ability of interventions to defend any particular level is increasingly seen as limited.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Economic Implications of Rupee Depreciation<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li aria-level=\"1\"><b>Impact on Inflation<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">A weaker rupee increases the cost of imports, particularly crude oil, leading to higher fuel prices and broader inflationary pressures.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">According to State Bank of India&#8217;s Group Chief Economic Advisor, the rupee has reached a &#8220;<\/span><b>critical depreciation threshold<\/b><span style=\"font-weight: 400;\">&#8221; beyond which further weakness could erode the benefits of recent domestic fuel price hikes.<\/span><\/li>\n<\/ul>\n<\/li>\n<li aria-level=\"1\"><b>Impact on Current Account<\/b><\/li>\n<li><span style=\"font-weight: 400;\">Higher import costs widen the current account deficit, putting further pressure on the rupee in a self-reinforcing cycle.<\/span><\/li>\n<li aria-level=\"1\"><b>Impact on Investor Sentiment<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">A rapidly depreciating currency can hurt investor confidence, accelerating capital outflows and creating further pressure on the rupee.<\/span><\/li>\n<\/ul>\n<\/li>\n<li aria-level=\"1\"><b>Impact on External Debt<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">A weaker rupee increases the cost of servicing external debt in rupee terms, raising the financial burden on Indian companies and the government.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Comparison with the 2013 Taper Tantrum<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The current situation has drawn comparisons with the 2013 Taper Tantrum, when India was labelled among the &#8220;Fragile Five&#8221; economies. However, key differences include:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">India&#8217;s forex reserves are significantly higher today.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">The macroeconomic fundamentals are stronger in many respects.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">The policy response toolkit has evolved, including options like swap lines and targeted interventions.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Nevertheless, structural vulnerabilities remain, including high import dependence on crude oil and gold, and exposure to global monetary policy shifts.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Policy Responses<\/strong><\/h2>\n<ul style=\"text-align: justify;\">\n<li aria-level=\"1\"><b>RBI Interventions<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Dollar sales to defend the rupee.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Forward market interventions to manage volatility.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Restrictions on certain derivative contracts to curb speculation.<\/span><\/li>\n<\/ul>\n<\/li>\n<li aria-level=\"1\"><b>Government Measures<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Higher import duties on gold to reduce non-essential imports.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Considering cuts in withholding tax to attract foreign investors.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Fuel price hikes to manage the burden of higher crude oil costs.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">PM&#8217;s austerity appeal urging citizens to reduce gold and petrol consumption.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><strong>Way Forward<\/strong><\/h2>\n<ul>\n<li style=\"text-align: justify;\" aria-level=\"1\"><b>Short-Term Measures<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Targeted RBI interventions to prevent disorderly depreciation.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Attracting NRI deposits through schemes like FCNR(B) deposits.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Diversifying crude oil sources to reduce dependence on West Asia.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Promoting gold monetisation to channel idle gold into the economy.<\/span><\/li>\n<\/ul>\n<\/li>\n<li aria-level=\"1\"><b>Long-Term Structural Reforms<\/b>\n<ul>\n<li style=\"text-align: justify;\"><span style=\"font-weight: 400;\">Boosting manufacturing exports through PLI and Make in India.<\/span><\/li>\n<li style=\"text-align: justify;\"><span style=\"font-weight: 400;\">Deepening financial markets to attract stable long-term capital.<\/span><\/li>\n<li style=\"text-align: justify;\"><span style=\"font-weight: 400;\">Strengthening forex reserves as a buffer against external shocks.<\/span><\/li>\n<li style=\"text-align: justify;\"><span style=\"font-weight: 400;\">Accelerating the renewable energy transition to reduce crude oil dependence.<\/span><\/li>\n<li style=\"text-align: justify;\"><span style=\"font-weight: 400;\">Enhancing competitiveness through labour, land, and capital market reforms.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><b>Source:<\/b> <a href=\"https:\/\/indianexpress.com\/article\/business\/as-rupee-stares-at-100-to-a-policymakers-engage-with-a-lesson-from-just-three-years-ago-10694773\/\" target=\"_blank\" rel=\"nofollow noopener\"><span style=\"font-weight: 400;\">IE<\/span><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Currency depreciation of rupee has touched record lows against the dollar, with policymakers reflecting on the consequences of past artificial stabilisation efforts.<\/p>\n","protected":false},"author":21,"featured_media":103901,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[7585,60,22,59],"class_list":{"0":"post-103895","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"tag-currency-depreciation","9":"tag-mains-articles","10":"tag-upsc-current-affairs","11":"tag-upsc-mains-current-affairs-tag","12":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/103895","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/21"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=103895"}],"version-history":[{"count":2,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/103895\/revisions"}],"predecessor-version":[{"id":103898,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/103895\/revisions\/103898"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/103901"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=103895"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=103895"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=103895"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}