NOSEDIVING OF INDIAN RUPEE: IS IT INJURIOUS TO ECONOMY. ?

 EVOLUTION OF FOREIGN EXCHANGE RATE SYSTEM  

Foreign exchange rate refers to the  rate at which a county's domestic currency is exchanged with a foreign country currency. It  is the external purchasing power of the domestic currency.Obviously it is determined by the relative demand and supply of currencies for transactions abroad which in turn is impacted by participation in  trade  in goods, trade in services, IP rights foreign investments and external borrowings.The evolution of exchange rate system was a thrilling journey from ancient bartering to metal coins  to gold standard.Under Gold Standard countries fixed the value of their currencies in terms of a specified amount of gold or linked their currency to that of a country  which did so.Later in 1944 a new system of fixed exchange rate system was followed and currencies were pegged to specific amount of gold and the exchange rate was determined in  their value relative to gold.Afer 2nd world War  the Bretton Woods Agreement   (1944) established a new system of fixed exchange rate where currencies were pegged to the US $ ,which in turn was covertible to gold at $35 per ounce.and the system was managed by IMF..Unfortunately the system failed to work after US economy suffered from persistent balance of Payments deficits during  1960s .However later in  early most of major countries opted for a transition from fixed exchange rate to floating exchange rates where value is determined by demand and supply in the  market.

 While the case for fixed exchange rate  has the  advantages of stability, boosting long term capital flows, no fear of currency fluctuations, no adverse effect of speculation, best suited for small countries and  multilateral trade and less inflationary.On the oher hand advocates of floating/flexible exchange rate emphasised factors like smoother and simple operations,autonomy of economic policies, international liquidity, and effectiveness of monetary policy and so on.The evolution of provides better internat liquidity.,nomIndia's modern foreign exchange market. Evolution of India's exchange rate system   witnessed tremendous transformations since independence.In !947  owed that rupee was  pegged to pound sterling under Bretton Woods system with a fixed par value of 4.15 grains of fine gold. Later rupee  was pegged t o US dollar. Further Indian Rupee was pegged to a basket of currencies in !970s and 1980s.During fixed exchange regime in zIndia there were three major devaluations of Indian rupee in 1948,1966and 1991ajor breakthrough occurred in March 1993 When India adopted a market determined exchange rate allowing the value of exchange rate to be determined automatically by forces of demand and supply in foreign exchange markets. .In nutshell India has transformed from a fixed exchange rate system between 1947 to 1991 to a liberalised market determined exchange rate management system in 1993.

MOVEMENTS OF INDIAN CURRENCY 

The  value of Indian rupee has been weakening over the years from approximately ₹ 3.33 per US $ in 1947to ₹7.50  in 1966  and nosediving to ₹ 83.28 per $ in May 2024. In fact Indian  currency the rupee depreciated very sharply against US dollar about 7% during late November 2024  and now  from roughly ₹ 83.4 per $ to about ₹ 90 (89.2) at present, and  since May rupee remains Asia's worst performing currency.More  severe depreciation of the rupee has happened in 2018 against US dollar to the extent of 11-12%.This was the period of first term of US President Donald Trump charecterised by rising global dollar strength,  rise in US interest rate,and trade tensions impacting emerging market currencies including Indian Rupee. Inorder to cope up with the situation Reserve Bank of India adopted long-term currency swaps under trend haanalysts fear that it may slide to rupees 90 for one dollar without much delay .Unfortunately rupees performance during this period was very poor compared to that of major Asian economy currencies like Chinese Yuan and Indonesian Rupiah.

WHY  RUPEE SHOWED WORST PERFORMANCE

Experts attributed various reasons for the poor performance of Indian currency. Many opined that the sharp depreciation was the cumulative impact of several factors namely  the Imposition of 50% tariff by USA against India hurting Indian exports, contrary to  the past experience wherein US remained the largest trading partner of India for several years.In addition to US  tariff, high crude oil imports, sky rocketing prices of  precious metals ,in combination  with adverse geo economic and geo political environment,  merchandise trade deficit etc. aggravated rupee depreciation further. More over in recent months FDI outflows also outpaced FDI inflows making net FDI negative at - $ 2.4 billion In September 2025.Declining rupee has been observed as the major reason for foreign outflows including, foreign Direct Investment, foreign portfolio investment and foreign institutional investment. 

HOW TO TACKLE 

RBI has the primary responsibility of maintaining stability in exchange rate and it is the custodian of foreign exchange reserves in the country. 

RBI has been using currency swaps as a systemic liquidity check in order to stabilise value of rupee.,In 2019 it exhausted  $ 5 billion three year  dollar/rupee  swap.  wheras in February 2025 it rose to$10 billion dollar/rupee swaps During the last one year between November 2024 and November  2025 RBI sold about $ 50 billion foreign exchange reserves to stabilise rupee depreciation. Obviously  Reserve Bank of India  has been intervening to avert  the fall of rupee regularly..In November 2025 as and when dollar exchange rate breached ₹88.80 per $  RBI intervened and  later it temporarily scaled back. The nosediving of rupee in November 2025 was due to external pressures of widening current account deficit, higher bullion imports considered as a hedge towards uncertain times .Fifty percent tariff imposed by US on Indian goods exports and investors withdrawal of $ 16.5 billion from Indian equities since August 2025 have aggravated the fall of rupee. Increasing trade deficit and unprecedented surge in both gold prices and gold imports contributed to currency depreciation as well as growing trade  deficit. It is rather very significant that despite rupees weaknesses and frequent release of forex reserves RBI still maintains a strong buffer of foreign exchange reserves  of $698 billion as on September 2025. which provided greater degree  of  exchange rate  stability  under the existing managed floating exchange rate regime in India. Fiscal incentives and other policy  support better infrastructure  and assistance in diversifying of exports to non traditional markets and countries are likely to boost exports. 

IMPACT ON THE ECONOMY 

The impact of rupee depreciation may affect different sectors and groups differently. 

Weakening of rupee is bound to increase the cost of imports especially that of essential goods like crude oil, fertilizers and electronics which may lead to reduction in consumer's purchasing power and increase inflationary tendencies. Exporters will generally gain provided the import contents of their export goods are moderate .In any case importers will have to suffer. While emigrant households recieving remittances from Indian diaspora stand to gain parents of  Indian students undergoing education in various universities and institutions abroad may find it tough.. It has been observed  that an  estimated 759,000 to 1.33 million Indian students studied abroad in 2024. If we are able to diversify and boost our exports in the light of fall in price of Indian goods due to currency depreciation it is very much desirable. Infact in the last few years due to rising trade deficit of USA with China US were blaming China for deliberately keeping value of Chinese currency Yuan low thereby penetrating and flooding Chinese goods in US markets. 

CONCLUSION 

The exchange rate  of Indian rupee is closely moving towards ₹90  per one US dollar amidst limited RBI intervention and more portfolio outflows. 

The above discussion showed that recent nosediving of Indian rupee was aggravated by US tariff policy and uncertainty regarding economic policy towards India ,rising trade deficit between US and India,unprecedented outflows of foreign investment both FDI and foreign portfolio investment, Since macroeconomic fundamentals are strong including high GDP growth, bop stability ,low inflation, record number of start ups,MSMES etc Many argue that since our macro fundamentals are strong with vibrant GDP growth rate of 8.2% for Q2 period July- September 2025-26 and  robust foreign exchange reserves position capable of meeting 11 months import requirements ,fluctuations in exchange rate does not matter .But in the absence of  more  goods exports but increasing costs of essential imports , higher foreign investment outflows from the country and emerging geopolitical conflicts, it may be  observed that, despite vibrant  health  of the domestic economy,  continues sneezing is bound to occur in rupee  exchange rate and foreign exchange market.