{"id":78765,"date":"2025-12-20T11:00:06","date_gmt":"2025-12-20T05:30:06","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=78765"},"modified":"2025-12-20T11:24:19","modified_gmt":"2025-12-20T05:54:19","slug":"why-the-indian-rupee-is-weakening-against-the-dollar-despite-strong-fundamentals","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/why-the-indian-rupee-is-weakening-against-the-dollar-despite-strong-fundamentals\/","title":{"rendered":"Why the Indian Rupee Is Weakening Against the Dollar Despite Strong Fundamentals"},"content":{"rendered":"<h2><b>Declining Rupee Latest News<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Recently, the Reserve Bank of India sold large amounts of US dollars, boosting dollar supply and leading to a nearly 1% appreciation of the rupee.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">However, despite this intervention, the rupee has generally been weakening against the dollar over recent months.<\/span><\/li>\n<\/ul>\n<h2><b>A Year of Persistent Rupee Weakness<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Despite the intervention, the broader trend over recent months has been rupee depreciation.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Over the past year, the rupee has lost nearly 6% of its value against the US dollar, indicating sustained pressure on the Indian currency.<\/span><\/li>\n<\/ul>\n<h2><b>Why the Weakness Is Puzzling<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Strong Domestic Fundamentals<\/b><span style=\"font-weight: 400;\"> &#8211; On paper, the rupee should have strengthened. India remains the fastest-growing major economy, inflation is under control, and external sector indicators such as trade deficit and external debt are relatively stable.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Weakening Despite a Soft Dollar<\/b><span style=\"font-weight: 400;\"> &#8211; Earlier, the rupee\u2019s fall could be attributed to a globally strong dollar, as other currencies were also depreciating. However, in recent months, the dollar itself has weakened, yet the rupee has continued to slide.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Clear Signs of Currency Pressure<\/b><span style=\"font-weight: 400;\"> &#8211; The rupee\u2019s depreciation even during phases of dollar weakness removes the argument that global factors alone are responsible. This points to specific pressures on the Indian currency, underlining deeper challenges beyond temporary market interventions.<\/span><\/li>\n<\/ul>\n<h2><b>Why the Rupee Is Weakening Despite Global Currency Strength<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The rupee\u2019s depreciation stands out at a time when most major and emerging-market currencies are strengthening.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Multiple economic and financial factors explain this divergence.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Persistent Trade Deficit Pressures<\/b><span style=\"font-weight: 400;\"> &#8211; India continues to import more than it exports in value terms. Higher imports raise demand for US dollars relative to the rupee, pushing down the rupee\u2019s exchange rate.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Impact of High US Tariffs on Indian Exports<\/b><span style=\"font-weight: 400;\"> &#8211; The US has imposed some of the highest tariffs on Indian goods, making them less competitive abroad. Reduced export demand lowers demand for rupees, further weakening the currency.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Uncertainty Over the India\u2013US Trade Deal<\/b><span style=\"font-weight: 400;\"> &#8211; The prolonged uncertainty surrounding the India\u2013US trade agreement, despite official optimism of resolution in 3\u20134 months, discourages investors. Diplomatic tensions that triggered punitive tariffs amplify this risk aversion.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Weak Capital Inflows and Investor Apathy<\/b><span style=\"font-weight: 400;\"> &#8211; Global investors have largely avoided Indian markets in favour of others. Data show strong gains elsewhere\u2014US indices up 17\u201323%, China 16\u201327%, Japan 22\u201327%, FTSE 18%, Euro area 16%, Hong Kong 27%, Korea 72%\u2014while India\u2019s Sensex rose only about 8%.<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">This suggests investors view Indian equities as either overvalued or less profitable compared to global peers.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Role of RBI\u2019s Forex Interventions<\/b><span style=\"font-weight: 400;\"> &#8211; The Reserve Bank of India\u2019s buying and selling of dollars significantly influences the rupee\u2019s exchange rate. Such interventions can affect currency movements independent of underlying macroeconomic fundamentals.<\/span><\/li>\n<\/ul>\n<h2><b>Key Determinants of the Rupee\u2019s Movement<\/b><\/h2>\n<ul>\n<li><span style=\"font-weight: 400;\">A recent Bank of Baroda (BoB) study examined the key factors influencing the rupee\u2019s exchange rate using monthly data from October 2020 to November 2025.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The study found that three factors explain most of the rupee\u2019s exchange rate fluctuations:<\/span><\/li>\n<li><b>RBI\u2019s Spot Market Intervention<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Direct buying or selling of dollars by the RBI affects short-term currency movements.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">However, its impact is less significant than forward market operations.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>RBI\u2019s Position in Forward Contracts<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Changes in the RBI\u2019s forward dollar positions play a more influential role than spot interventions.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Forward market intervention sends a strong signal to markets, making it a more effective tool when the rupee is under pressure.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Foreign Portfolio Investment (FPI) Flows<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">In the immediate term, FPI inflows or outflows are a major driver of the rupee\u2019s movement.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Investor sentiment and capital flows significantly affect exchange rate dynamics.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h3><b style=\"font-size: inherit;\">Why Trade Deficit Matters Less Than Expected<\/b><\/h3>\n<ul>\n<li><span style=\"font-weight: 400;\">Surprisingly, the trade deficit showed little direct impact on short-term rupee movements.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This is because trade data reflect accounting entries rather than actual dollar flows in the same period.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Exporters are allowed to retain dollar earnings overseas for a stipulated time before repatriation, weakening the immediate link with exchange rates.<\/span><\/li>\n<\/ul>\n<h3><b>Limits of Economic Variables<\/b><\/h3>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">No single factor explained more than 13\u201314% of the total variation in the rupee\u2019s exchange rate.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This indicates that non-economic factors\u2014such as market psychology, geopolitical developments, and policy signals\u2014also play a significant role.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">While RBI interventions and forward positions matter, <\/span><b>foreign portfolio flows dominate short-term rupee movements<\/b><span style=\"font-weight: 400;\">, and exchange rates are influenced by factors beyond traditional economic fundamentals.<\/span><\/li>\n<\/ul>\n<p><b>Source:<\/b> <strong><a href=\"https:\/\/indianexpress.com\/article\/explained\/explained-economics\/rupee-weakness-dollar-10428785\/\" target=\"_blank\" rel=\"nofollow noopener\">IE<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Why is the rupee falling despite strong growth and low inflation? RBI actions, FPI flows, and global trade tensions explain India\u2019s currency pressure.<\/p>\n","protected":false},"author":18,"featured_media":78794,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[4314,60,22,59],"class_list":{"0":"post-78765","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"tag-declining-rupee","9":"tag-mains-articles","10":"tag-upsc-current-affairs","11":"tag-upsc-mains-current-affairs","12":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/78765","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\/18"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=78765"}],"version-history":[{"count":0,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/78765\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/78794"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=78765"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=78765"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=78765"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}