What are the possible reasons for the persistent depreciation of the Indian Rupee against the US Dollar?

The Indian Rupee has witnessed a persistent depreciation against the US Dollar over the years. This trend is influenced by a mix of domestic and global factors, as well as policy choices. Understanding these reasons is important for analyzing India’s macroeconomic stability and external sector dynamics.

• Widening Current Account Deficit (CAD): India often imports more than it exports, especially crude oil and gold. A large CAD increases the demand for US Dollars, putting pressure on the Rupee.
• Capital Outflows: When foreign investors pull money out of Indian markets (equity or debt), they convert Rupees to Dollars, leading to depreciation. This can happen due to global uncertainties or better returns in other countries.
• Strengthening of the US Dollar: When the US Dollar strengthens globally due to higher US interest rates or safe-haven demand, emerging market currencies like the Rupee tend to weaken.
• Higher Inflation in India: If inflation in India remains higher than in the US, the Rupee loses value relative to the Dollar over time.
• Trade and Geopolitical Tensions: Events such as global trade wars, sanctions, or geopolitical tensions can lead to risk aversion, prompting investors to move funds to the US Dollar.
• Policy Decisions: RBI’s intervention in the forex market, interest rate policies, and capital controls can affect the Rupee’s value. Sometimes, the central bank may let the currency depreciate to boost exports.
• Structural Economic Issues: Slowdown in economic growth, fiscal deficit, and lack of competitiveness in exports can weaken investor confidence in the Rupee.
• External Debt Repayments: When Indian companies or the government have to repay foreign loans, they need to buy Dollars, increasing demand for the US currency.
• Global Commodity Prices: Rising prices of crude oil and other essential imports raise India’s import bill, worsening the trade deficit and putting pressure on the Rupee.