Stop Blaming the Rupee

Why the rupee is meant to fall

Photo by rupixen on Unsplash

What’s the strongest you remember the rupee being?

If you’re young, your answer is probably around ₹80 per U.S. dollar. Someone older might remember ₹60, ₹45, or even ₹20.

It feels as though the rupee has been falling forever.

Whenever it weakens, the blame usually falls on geopolitics, oil prices, or the war among the middle east. While these events certainly matter in the short run, they aren’t the whole story.

The uncomfortable truth is -

The fall of the rupee is inevitable, trying to defend it over a long term could mean bad things upon our economy.

So why is this the case?

1. India Needs More Imports Than It Can Produce

Developing countries are still building infrastructure.

India imports large quantities of:

• crude oil
• machinery
• electronic components
• advanced technology
• industrial equipment

Every import requires payment in foreign currency, mostly U.S. dollars.

The more dollars Indian businesses need, the greater the demand for dollars and the greater the selling pressure on the rupee.

This is basic economics.

2. India Depends on Foreign Capital

India’s ambitions require enormous investment.

Domestic savings alone are not enough to finance all the infrastructure, factories, startups, and businesses the country needs.

Foreign investors therefore play an important role in both the capital (long term) and money markets (short term).

Whenever global investors move money out of India (like it is happening right now because of Indian market valuation), demand for dollars rises and the rupee comes under pressure.

3. India Imports Most of Its Oil

India imports more than 90% of the crude oil it consumes.

Oil is one of the country’s largest import bills.

When global crude oil prices rise:

• India needs more dollars.
• Oil companies sell more rupees to buy those dollars.
• The rupee weakens.

This is one of the biggest structural reasons the rupee tends to face downward pressure.

Not a fun fact- even though India imports most of its oil requirements, it has one the lowest oil reserves in the world.

4. Inflation Differential

Among all the reasons, this is perhaps the most important over the long run.

India generally experiences higher inflation than the United States.

Economists call this difference the inflation differential.

Simply put,

Inflation Differential = India’s Inflation − U.S. Inflation

If India’s inflation averages 6% while U.S. inflation averages 2%, India has an inflation differential of 4 percentage points.

Why does this matter?

Because goods in India become expensive faster than identical goods in the United States.

Imagine India and the U.S. both sell the same T-shirt.

Year 1

• Indian T-shirt = ₹100
• American T-shirt = $1
• Exchange rate = ₹100 = $1

Both shirts cost exactly the same.

One Year Later

Suppose:

• Inflation in India = 10%
• Inflation in the U.S. = 0%

Now:

• Indian T-shirt = ₹110
• American T-shirt = $1

If the exchange rate remains ₹100 per dollar, the Indian T-shirt now costs an American buyer $1.10, while the American T-shirt still costs $1.

The Indian product has become more expensive even though it is identical.

As Indian goods become relatively more expensive, exports become less competitive.

To restore competitiveness, the exchange rate gradually adjusts.

Instead of ₹100 per dollar, it may move closer to ₹110 per dollar.

Once again, both T-shirts effectively cost $1.

This long-term adjustment is explained by the theory of Purchasing Power Parity, which suggests that exchange rates tend to reflect differences in inflation over time.

Does This Mean the Rupee Is Doomed?

Not necessarily.

Depreciation is common for developing economies, but it is not an economic law.

If a country’s productivity grows faster than its inflation, its currency can strengthen over time.

Several countries have done exactly that.

• South Korea transformed itself into a global manufacturing and technology powerhouse, helping support its currency.
• Taiwan combined strong productivity with export-led growth, strengthening its currency over the long run.
• Singapore has maintained one of the world’s strongest currencies by combining exceptional productivity with an exchange-rate-focused monetary policy.

These countries show that productivity can outweigh inflation.

Conclusion

A gradually depreciating rupee is not necessarily a sign of economic weakness.

For a developing economy like India, it is often the result of four structural realities:

• high import dependence,
• reliance on foreign capital,
• heavy crude oil imports,
• consistently higher inflation than developed economies.

As long as these conditions persist, some degree of depreciation should be expected.

The real objective, therefore, is not to prevent every fall in the rupee. It is to build an economy where productivity grows faster than inflation. When that happens, the currency has a much stronger chance of stabilizing — or even appreciating — over the long run.

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