The Rupee has depreciated to ₹90.41 against the U.S. Dollar on December 3, 2025 which is a new record. It is among the worst performing currencies in recent times. Experts attribute this steep fall of the Indian Rupee to FPI and other capital outflows due to more attractive investment opportunities in AI stocks in other markets, delayed conclusion of trade deals especially with the U.S., decline in exports due to the penal U.S. tariffs and global trade uncertainty, widening current and capital account deficits due to capital outflows, sanctions on the import of cheap Russian oil pushing up overall crude oil import expenditure due to more expensive alternative sources, and rising import costs of gold due to the prevailing high prices of gold.
Neither the economists at the Finance Ministry, nor the economists at the Reserve Bank of India seem to be unduly perturbed by a steeply depreciating Rupee, as the domestic rate of inflation is well below the tolerable range of 2 to 6%, GDP is growing at a healthy rate of around 8% in the first two quarters of this financial year and agriculture, manufacturing and services are performing according to expectations. Some even argue that the weightage of import prices in our Consumer Price Index is too minimal to have a significant impact on our domestic rate of inflation. Moreover the recent GST rate reduction and rationalisation, and the huge public capital expenditure on infrastructure and other sectors is likely to lead to a domestic demand revival and sustain the growth momentum of the economy.
Some economists welcome rupee depreciation as it cheapens our exports and make them attractive for foreign buyers, while rendering our imports unattractive for domestic consumers. But does a falling rupee really help our economy? For this we have to examine what economic theory has to offer on the subject. Let us consider a simple textbook example of trade between two countries, involving only two commodities, namely, wheat and cloth. Let the two countries be U.S. and India. Let both the countries produce both the products. However each would like to specialise only in one product, export it and import the other product. Let us assume that the U.S. is more productive than India and as a result, there are differences in wage rates between the two countries.
We assume that the workers in the U.S. work one hour each in producing 6 bushels of wheat and 4 yards of cloth and earn $6 per hour. Similarly, the workers in India work one hour each in producing 1 bushel of wheat and 2 yards of cloth and get paid ₹100 per hour. If labour cost is the only cost that determines the per unit price of wheat and cloth, then using the rupee-dollar exchange rate, it is possible to identify a basis for mutually beneficial trade between the two countries.
Initially, let us consider a hypothetical exchange rate of ₹20: $1. Using this exchange rate and the prevailing wage rate per hour in the two countries, let us express the per unit price of wheat and cloth in dollars alone. Accordingly, in the U.S. one bushel of wheat will cost $1 and one yard of cloth will cost $1.5. Likewise in India, when the wage rate in rupees is converted into dollars using the above exchange rate, one bushel of wheat will cost $5 and one yard of cloth will cost $2.5. Therefore, at the exchange rate of ₹20:$1, there is no basis for mutually beneficial trade between the two countries, as US turns out to be the cheapest producer of both the products. US would like to export both to India while India will have nothing to give in return.
Now let us make the rupee cheaper against the dollar by considering an exchange rate of ₹40:$1. Using this exchange rate and the prevailing wage rate per hour, expressed in dollars for both the countries, one bushel of wheat will cost $1 in the U.S. and $2.5 in India, while one yard of cloth will cost $1.5 in the US and $1.25 in India. At this exchange rate, mutually beneficial trade is possible between the two nations, as wheat is relatively cheaper in the US while cloth is relatively cheaper in India. US will specialise in wheat production and export it in return for Indian cloth. So in this simple illustration, rupee depreciation against the dollar has helped India achieve trade parity with the US. If the rupee depreciates even further, let’s say to ₹60 per dollar, the trade benefit to India will be even better.
But there is also a downside to rupee depreciation. India being largely an importing nation, currency depreciation will make imports even more expensive and widen India’s current account deficit as a percentage of its GDP. The fall in the international value of the rupee may have domestic consequences as well. The domestic rate of inflation will rise and the RBI may adopt a tight money policy to counter this, which will further hurt investment and growth. Capital flows to India may also decline because of a rising current account deficit and a rising domestic rate of inflation, which will further weaken the rupee internationally. All this proves that there is a limit beyond which currency depreciation does not help a nation economically.
Now, consider a totally different scenario. India manages to improve farm labour productivity, by investing in suitable production technologies, while conditions in the US remain the same. Assume in India, workers now produce 4 bushels of wheat per hour and 3.5 yards of cloth per hour, while US workers continue to produce 6 bushels of wheat and 4 yards of cloth per hour, respectively. The wage rate in both the countries also remains the same as before, i.e., $6 per hour in the U.S. and ₹100 per hour in India. Even at the earlier exchange rate of ₹20:$1, trade between India and the U.S. now becomes mutually beneficial. In terms of per unit prices, 1 bushel of wheat will cost $1 in the U.S. and $1.25 in India, while 1 yard of cloth will cost $1.5 in the US and $1.43 in India. Since wheat is relatively cheaper in the U.S. and cloth is relatively cheaper in India, U.S. will specialise in wheat production and India in cloth production and they will exchange their respective products of specialisation.
So, even with a relatively stronger rupee, it is possible to gain from international trade, if we improve the productivity of labour and capital through appropriate investments in Research and Development, transport infrastructure, energy, education and health. If through economic policy, we are able to remove the impediments to improved productivity, then it is not necessary to rely on currency depreciation to improve our export performance. Currency depreciation can at best be a short term measure to boost exports and bridge the short run trade deficit. The solution however lies in improving overall economic efficiency, for which huge investments have to be made in the areas mentioned above.
In conclusion it can be said that while currency depreciation leads to an increase in overall export value, it need not necessarily result in an increase in export volume. Therfore currency depreciation contributing to improved export competitiveness is only one side of the story. The other side depends on export capacity and productivity, the prevailing opportunities for exports and bilateral trade relations and agreements. Given the current geopolitical and trade uncertainties plaguing the world economy, it is too much to expect a falling rupee to boost India’s exports unless there is progress on the other fronts aswell.
No doubt the U.S. dollar is strengthening against other currencies, as is the price of gold in the global market, since both are considered as safe haven investments, when faced with global economic and political unrest. The war in Europe shows no signs of abatement while war clouds are gathering on the horizon near Venezuela. Therfore it is advisable for the Reserve Bank of India and the Government of India to put in place a strategy to counter the rupee depreciation by offering exporters interest rate rebates and incentives to deposit their dollar earnings in India, offer attractive terms and rates of interest on dollar-denominated bonds and NRI deposits, encourage Corporates to speed up their dollar borrowing plans and deposit their dollar earnings in domestic banks and encourage domestic banks to enter into currency swaps with American banks.
(B. Bhagwan Das is Former Associate Professor of Economics ,Loyola College, Chennai)
Published – December 08, 2025 06:00 am IST
