Image used for representational purposes. File
| Photo Credit: Reuters

The graph of the Indian rupee has been snaking sharply downward. The rupee-to-dollar exchange rate, or the rupees needed to purchase a U.S. dollar, crossed 96 in May this year. That rate was around 85 a year ago, indicating the rupee’s decline in value since then.

Exchange rate is the price that a currency, such as the rupee, commands in the market, relative to the dollar or other currencies. Just as the market price of onions is determined by demand and supply, so is the price of a currency.

What is the impact of trade deficits on the rupee’s value?

The demand for the rupee rises with India’s exports and falls with imports. When firms in Ludhiana export garments, the dollars or euros they receive from foreign buyers are exchanged for rupees to pay workers and suppliers, thereby increasing demand for the rupee. On the other hand, Indian companies import oil by exchanging rupees for dollars, thereby reducing the demand for the rupee. Rupee demand also declines when we travel abroad and exchange rupees at the airport for the currency of our destination country.

Overall, if India’s imports exceed exports, the foreign currency payments it must make to the rest of the world exceed the foreign currency payments it receives. That implies more rupees are exchanged for dollars than dollars are exchanged for rupees, leading to declines in the demand for, and the value of the rupee (requiring more rupees to purchase one dollar).

Thus, a currency’s exchange rate is closely tied to the country’s balance of (foreign currency) payments (to and from the rest of the world). India has consistently run a merchandise trade deficit, with imports of goods (especially oil) exceeding exports. The deficit in its merchandise trade account is partially offset by a surplus in India’s invisibles. That is mainly thanks to foreign currency inflows from the export of services, particularly software, and to the large remittance inflows from migrant workers, especially in West Asian countries. Overall, India’s current account, which is the sum of merchandise trade and the invisibles accounts, has been in deficit (Table 1).

The gap in the current account, between the foreign currency payments India owes to the rest of the world and the foreign currency payments it receives, has been bridged by inflows through the capital account, mainly foreign investment and loans. If the current account deficit is more than offset by a surplus in the capital account, the excess foreign currency received is added to the country’s foreign exchange (or forex) reserves (Table 1).

How do capital outflows weaken the rupee?

A country’s forex reserves are as valuable as a family’s treasure trove. The reserves are tapped to pay for critical imports during periods of insufficient foreign currency inflows, and to defend the currency’s value when capital outflows are too large (discussed below).

Foreign direct investment (FDI) is mostly in new or existing factories and businesses and, as a result, has some ties binding it to the host country. In comparison, foreign portfolio investment (FPI), which involves purchases of stocks or bonds, is highly volatile and driven by speculation. Portfolio investors enter a country seeking quick financial returns and exit at the first sign of risk or when higher returns are offered elsewhere. When FPI surges in, the stock markets are on a roll; when it flows out, it leaves a trail of destruction. Capital outflows imply that investors withdraw their investments in rupee assets and exchange them for dollar assets, leading to a tumble in demand for the rupee and in its exchange rate.

The periods of rapid depreciation of the Indian rupee have each been characterised by worsening of the trade account, FPI outflows, or both. These include April to September 2013 (when the rupee-to-dollar rate fell from 54.4 to 63.8); January to October 2018 (from 63.6 to 73.6); February to April 2020 (from 71.5 to 76.2); January to October 2022 (from 74.4 to 82.3); September 2024 to February 2025 (from 83.3 to 87.1); and the latest phase that began in May 2025 (from 85.2 to 96) (Chart 1). The recent losses in the rupee have mainly been due to foreign investors withdrawing from India as they retreat to the safety of their home bases amid growing geopolitical tensions and higher U.S. interest rates.

The depreciation of the rupee imposes a high cost on the Indian economy. To purchase a barrel of oil at $100, Indian companies now must pay ₹9,600, compared to ₹8,500 had the exchange rate remained at ₹85 per dollar. However, a depressed rupee can help boost exports: a shirt costing ₹1,200 can be sold in the U.S. market at $12.5 now; if the exchange rate were ₹80 per dollar, the price would have been $15. But rupee depreciation alone may not help much, given the range of supply and demand constraints weighing on Indian manufacturing.

What is the role of the RBI?

The Reserve Bank of India (RBI) intervenes to prevent the exchange rate from falling to very low levels. When foreign investors rush out by selling their rupee assets for dollars, the RBI props up the rupee by selling some of the dollars (or treasury bonds) from its reserves. This raises the demand for rupee and slows its decline (as it did during October 2024-January 2025 and August-December 2025) (Chart 2). India’s forex reserves remain sufficiently large: they stood at around USD 691.11 billion at the end of March 2026, enough to cover 10.8 months’ worth of the country’s imports (as of the end of December 2025). That is a mighty armoury the RBI can deploy to shield the rupee against impending speculative tides.

The ongoing geopolitical tensions and the threat of further oil price increases pose severe challenges. India could be at risk of paying more dollars per barrel of oil and more rupees per dollar. The country must take steps to regulate speculative capital outflows and reduce its dependence on oil imports.

(Jayan Jose Thomas is a Professor of Economics at the Indian Institute of Technology Delhi, and a visiting researcher at the South Asia Institute of the University of Heidelberg.)

Published – May 26, 2026 07:30 am IST

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| Photo Credit: Getty Images/iStockphoto

 The overall kitty had increased by $4.368 billion to $693.318 billion in the previous reporting week. File
| Photo Credit: Reuters

Image used for representation purpose only.
| Photo Credit: Getty Images/iStockphoto

Image used for representation purpose only.
| Photo Credit: The Hindu

India’s forex reserves rose $1.05 billion to $630.607 billion for the week ended January 31, the RBI said on Friday (February 7, 2025)

In the previous reporting week, the overall reserves had increased by $5.574 billion to $629.557 billion.

This is the second consecutive week of an increase in the reserves, which have otherwise been on a declining trend for the last few weeks due to revaluation along with forex market interventions by RBI to help reduce volatilities in the rupee.

The forex reserves had increased to an all-time high of $704.885 billion in end-September 2024.

For the week ended January 31, foreign currency assets, a major component of the reserves, decreased by $ 207 million to $537.684 billion, the data released on Friday showed.

Expressed in dollar terms, the foreign currency assets include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.

Gold reserves increased by $1.242 billion to $70.893 billion during the week, the Reserve Bank of India said.

The Special Drawing Rights (SDRs) were up by $29 million to $17.889 billion, the apex bank said.

India’s reserve position with the IMF was down by $14 million at $4.141 billion in the reporting week, the apex bank data showed.

Photo used for representation purpose only.
| Photo Credit: Getty Images/iStockphoto

India’s forex reserves dropped by $5.693 billion to $634.585 billion in the week ended January 3, the Reserve Bank of India said on Friday (January 10, 2025).

In the previous reporting week, the overall kitty had declined by $4.112 billion to $640.279 billion.

The reserves have been on a declining trend for the last few weeks, and the drop has been attributed to revaluation along with forex market interventions by RBI to help reduce volatility in the rupee. The forex reserves had increased to an all-time high of $704.885 billion in end-September.

For the week ended January 3, foreign currency assets, a major component of the reserves, decreased by $6.441 billion to $545.48 billion, the data released on Friday (January 10, 2025) showed.

Expressed in dollar terms, the foreign currency assets include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.

Gold reserves increased by $824 million to $67.092 billion during the week, the RBI said.

The Special Drawing Rights (SDRs) were down by $58 million to $17.815 billion, the apex bank said.

India’s reserve position with the IMF was down by $18 million at $4.199 billion in the reporting week, the apex bank data showed.

Photo used for illustration purpose only.
| Photo Credit: Reuters

The country’s forex reserves dropped by a further $8.478 billion to $644.391 billion for the week ended December 20, the RBI said on Friday (December 27, 2024).

In the previous reporting week, the reserves had dropped by $1.988 billion to a six-month low of $652.869 billion.

The reserves have been declining for the last few weeks, and the drop has been attributed to revaluation along with forex market interventions by RBI to help reduce volatilities in the rupee. The forex reserves had increased to an all-time high of $704.885 billion in end-September.

For the week ended December 20, foreign currency assets, a major component of the reserves, decreased by $6.014 billion to $556.562 billion, the data released on Friday (December 27, 2024) showed.

Expressed in dollar terms, the foreign currency assets include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.

Gold reserves decreased by $2.33 billion to $65.726 billion during the week, the RBI said.

The Special Drawing Rights (SDRs) were down by $112 million to $17.885 billion, the apex bank said.

India’s reserve position with the IMF was also down by $23 million to $4.217 billion in the reporting week, the central bank data showed.

Image used for representation purpose only.
| Photo Credit: The Hindu

India’s forex reserves dropped by $3.709 billion to $701.176 billion for the week ended October 4, the RBI said on Friday (October 11, 2024).

In the previous reporting week, the reserves had jumped by $12.588 billion to an all-time high of $704.885 billion.

For the week ended October 4, foreign currency assets, a major component of the reserves, decreased by $3.511 billion to $612.643 billion, the data released on Friday showed.

Expressed in terms of dollar, the foreign currency assets include the effect of appreciation or depreciation of non-US units like the euro, pound and yen held in the foreign exchange reserves.

Gold reserves decreased by $40 million to $65.756 billion during the week, the RBI said.

The Special Drawing Rights (SDRs) were down by $123 million to $18.425 billion, the apex bank said.

India’s reserve position with the IMF was down by $35 million to $4.352 billion in the reporting week, the apex bank data showed.

Rupee notes displayed at a roadside currency exchange stall in New Delhi. File photo
| Photo Credit: REUTERS

The rupee witnessed range-bound trading in initial deals against the US dollar on Monday (August 12, 2024), as market participants remained on the sidelines ahead of the release of key domestic macroeconomic data.

Forex traders said for the USD/INR pair 84.00 level is acting as a psychological resistance. Market participants are also awaiting cues from the Indian CPI inflation and IIP numbers scheduled to be released later in the day.

At the interbank foreign exchange, the rupee opened at 83.95 against the greenback and traded in a tight range. In initial trade it touched 83.96, registering a fall of 1 paisa over its previous close.

On Friday, the rupee settled for the day higher by 2 paise at 83.95 against US dollar.

“The Indian rupee is expected to be calm as the Reserve Bank continues to buy dollars at lower levels and sell a smaller quantity to keep rupee in a small range,” Anil Kumar Bhansali, Head of Treasury and Executive Director Finrex Treasury Advisors LLP said.

The Reserve Bank of India (RBI) seems to be protecting 83.96 for now. Market also awaits for US CPI inflation data on Wednesday, Bhansali added.

Meanwhile, the dollar index, which gauges the greenback’s strength against a basket of six currencies, was trading 0.08 per cent higher at 103.22.

Brent crude, the global oil benchmark, advanced 0.18 per cent to USD 79.80 per barrel.

On the domestic equity market front, Sensex declined 269.65 points, or 0.34 per cent, to 79,436.26 points. The Nifty fell 74.65 points, or 0.31 per cent, to 24,292.85 points.

Foreign institutional investors (FIIs) were net buyers in the capital markets on Friday as they purchased shares worth ₹406.72 crore, according to exchange data.

Meanwhile, India’s forex reserves jumped by USD 7.533 billion to a new record high of USD 674.919 billion for the week ended August 2, the Reserve Bank said on Friday (August 9, 2024).