Rupee Depreciation (a fall in the value of the Indian Rupee, e.g., from ₹80/$ to ₹83/$) is a key indicator of India's external sector stability and its vulnerability to global and domestic economic pressures.
Background and Example
Causes: Depreciation is primarily driven by:
1Capital Outflows: Aggressive interest rate hikes by the US Federal Reserve make US assets more attractive, leading Foreign Portfolio Investors (FPIs) to pull money out of riskier emerging markets like India, increasing the demand for the US Dollar.
2Trade Deficit: India's persistent high Current Account Deficit (CAD)—driven largely by high-value imports like crude oil and gold—creates a structural deficit of the dollar, putting pressure on the Rupee's value.
Negative Impact (Imported Inflation): Since India imports a significant portion of its energy and high-end manufacturing inputs, a weaker Rupee translates directly into higher import costs.
Example: A rise in global crude oil prices combined with a depreciating Rupee means Indian oil companies pay significantly more Rupees for the same barrel of oil, leading to higher petrol and diesel prices, thus fueling Cost-Push Inflation across the economy.
Positive Impact (Export Competitiveness): A weaker Rupee makes Indian goods and services cheaper for foreign buyers.
Example: The Information Technology (IT) and IT-enabled Services (ITES) sectors benefit significantly, as they earn in US Dollars. When the Rupee depreciates, their dollar earnings translate into a higher amount of Rupees, boosting their revenue and profitability, which aids in reducing the trade deficit.
RBI's Role: The Reserve Bank of India manages this volatility through a Managed Floating Exchange Rate regime, primarily by selling US Dollars from its Foreign Exchange Reserves to counter sudden, speculative falls in the Rupee's value.
IAS-2026 - OPTIONAL / GEOGRAPHY / PUBLIC ADMINISTRATION / SOCIOLOGY / ANTHROPOLOGY / ORIENTATION ON 03 & 04-10-2025 
