Rupee Depreciation And Structural External Imbalances

Context

The article examines the persistent depreciation of the Indian rupee and links it to deeper structural imbalances in the economy.
It emphasises the need for internal economic reforms rather than relying on exchange rate management.
Source: Lesson in the Rupee’s fall: Fix the economy, not the exchange rate, The Indian Express

Trend And Nature Of Rupee Depreciation

Long-Term Depreciation: rupee declined from ₹45.9/$ (2010) to ₹95.04/$ (March 2026)
Average Depreciation Rate: ~4.6% annually over 16 years
Structural Pattern: consistent with economies having persistent trade deficits

Structural Drivers Of Depreciation

Limits Of Exchange Rate Intervention

Role Of External Pressures

India’s Adjustment Pattern

Exchange Rate Adjustment: rupee bears major burden of correction
Limited Structural Change: trade competitiveness and production not significantly adjusted
Short-Term Stability: gradual depreciation avoids abrupt shocks
Long-Term Risk: underlying imbalances remain unresolved

Widening External Imbalances

Comparative Global Adjustment Models

Interest Rate Adjustment: Brazil, South Africa raise rates to stabilise currency
Export-Led Adjustment: East Asian economies reduce imbalances through export growth
India’s Approach: gradual currency adjustment with limited structural correction

Need For Structural Reforms

Manufacturing Boost: expand domestic production base
Export Diversification: broaden product and market base
Stable Capital Inflows: shift towards FDI over volatile portfolio flows
Energy Diversification: reduce oil dependence via domestic production and renewables

Core Argument Of Article

Structural vs Price Adjustment: sustainable correction requires economic restructuring
Exchange Rate Limitation: cannot substitute for deeper reforms
Internal Adjustment Priority: long-term stability depends on domestic economic changes

India’s External Sector Dynamics and Policy Response

Concept: Refers to changes in the value of a country’s currency through appreciation/revaluation or depreciation/devaluation to correct external imbalances.
Market Alignment: Helps align the domestic currency with its true value based on demand and supply of foreign exchange.
Exchange Rate Regime: India follows a managed floating system, where market forces determine the Rupee’s value with RBI intervention to control excessive volatility.
Recent Trend: As of February 2026, the Indian Rupee averaged around ₹88.37 per USD.
REER Indicator: The Real Effective Exchange Rate stood at 103.37 (Feb 2026), indicating relative stability of the Rupee against a basket of 40 currencies.

Definition: Occurs when a country’s total imports of goods, services, and transfers exceed its total exports, making it a net borrower from the rest of the world.
Structural Drivers: India’s CAD is largely driven by high imports of crude oil and gold.
Recent Data (Quarterly): For Q3 FY2025-26 (Oct–Dec 2025), CAD widened to $13.2 billion (1.3% of GDP), up from $11.3 billion a year earlier due to a higher merchandise trade deficit.
Annual Trend: For April–December 2025, CAD moderated to 1.0% of GDP.
Balancing Factors: Strong services exports and remittances have helped cushion the deficit.

Concept: A comprehensive record of all economic transactions between residents of a country and the rest of the world over a specific period.
Components: Includes Current Account (trade in goods and services) and Capital Account (FDI, FPI, loans).
Structural Pattern: India offsets its merchandise trade deficit through surplus in services exports (especially IT and business services) and remittances.
Recent Position: During April–December 2025, India recorded a BoP deficit of $30.8 billion.
Implication: Indicates that total outflows exceeded inflows, leading to a decline in foreign exchange reserves on a BoP basis.
Remittance Strength: Remittances reached a record $135.4 billion in FY25, acting as a key stabilizing factor.

Definition: A monetary policy tool where the central bank buys or sells domestic currency in forex markets to influence exchange rates or maintain stability.
RBI Approach: Intervention is tactical, aimed at reducing excessive volatility rather than targeting a fixed exchange rate.
Forex Reserves: As of early 2026, India’s reserves stood at about $701.4 billion.
Import Cover: Provides approximately 11 months of import cover, indicating strong external buffer.
Policy Instruments: Includes USD/INR buy-sell swaps and Open Market Operations (OMO) to manage currency value and liquidity.

Concept: Expanding export basket (product diversification) and destination markets (market diversification) to reduce dependency risks.
Sectoral Transformation: India is shifting from traditional exports (textiles, gems) toward high-technology sectors.
Electronics Growth: Electronics exports increased by 32% to $38.58 billion in FY25, emerging as the third-largest export category.
Market Expansion: India is diversifying into Africa, ASEAN, and the Middle East to reduce dependence on traditional markets amid rising US tariffs (up to 50% on some goods in 2025).
Policy Support: Initiatives like the Production-Linked Incentive (PLI) scheme and Export Promotion Mission (EPM) (₹25,060 crore outlay for 2025–2031) are central to this strategy.

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