Currency Under Siege: Trade Tensions, Capital Flows, and the Depreciation of the Indian Rupee
Author: Yash Vilas Deshmukh
Literature Review
- Higher Tariffs and Rising Imports Increased the Need for Dollars
Dutta and Vajpayee explain that higher tariffs on Indian exports reduced their competitiveness globally, while increasing domestic demand for imported goods such as gold and silver created a stronger need for US dollars. This growing imbalance pushed the rupee closer to the 90-per-dollar mark and created anxiety among investors. RBI intervention through dollar sales helped slow volatility in the short term, but raised concerns about sustainability. The situation reflected how trade imbalances and rising import dependence can steadily weaken a currency and affect investor confidence (Dutta & Vajpayee, December 2, 2025).
- A Weak Rupee Made Interest Rate Cuts Risky
Roy and Sircar describe how declining inflation usually allows interest rate cuts to stimulate growth. However, the weakening rupee made such a move risky because lowering rates could encourage foreign investors to withdraw funds. Policymakers therefore faced a difficult balance between promoting economic growth and maintaining currency stability. This highlighted how external financial pressures influence domestic monetary policy decisions (Roy & Sircar, December 4, 2025).
- Investors Withdrawing Funds Increased Dollar Demand
Dutta attributes the rupee’s record decline to foreign investors withdrawing money from Indian markets due to trade uncertainty. As funds moved abroad, demand for dollars increased sharply, placing downward pressure on the rupee. The episode demonstrated how emerging economies depend heavily on foreign capital and how shifts in investor sentiment can quickly affect currency values (Dutta, December 11, 2025).
- Large Dollar Sales Helped Slow the Rupee’s Fall
Vajpayee and colleagues explain how RBI intervened by selling significant amounts of dollars to stabilize the exchange rate. While these actions reduced volatility in the short term, they also raised concerns about the long-term sustainability of reserves. Continuous intervention could weaken the central bank’s ability to respond to future shocks, highlighting the trade-off between immediate stability and future resilience (Vajpayee et al., December 7, 2025).
- Currency Weakness Affected Investors and Businesses Differently
Joshi notes that rupee depreciation influenced foreign investor confidence in Indian equity markets. Export-oriented industries benefited from a weaker currency, while sectors dependent on imports faced rising costs. The uneven impact across industries illustrated how currency movements can shift investment patterns and alter business performance (Joshi, December 15, 2025).
- A Gradual Fall Was Seen as Less Harmful Than a Sudden Drop
Sircar and Makol observe that RBI shifted its focus from trying to stop depreciation completely to slowing its pace. A gradual decline was viewed as less damaging than sudden shocks that could trigger panic in financial markets. This approach aimed to maintain stability while acknowledging that some depreciation was unavoidable in the face of external pressures (Sircar & Makol, January 21, 2026).
- Dependence on Foreign Investment Kept the Rupee Under Pressure
Sircar highlights that repeated withdrawals by foreign investors continued to put pressure on the rupee. As global financial conditions changed, funds moved out of Indian markets, increasing demand for dollars and weakening the currency further. The situation demonstrated the risks associated with reliance on external capital inflows and showed how global investor sentiment can directly influence domestic currency stability (Sircar, January 16, 2026).
- Limited Foreign Exposure Reduced the Impact on Some Sectors
Reports from Chemical Business indicate that Nuclear Power Corporation experienced minimal effects from rupee depreciation due to limited reliance on foreign borrowing and imports. Stable domestic financing and operations insulated the organization from exchange rate volatility. This showed that the impact of currency depreciation varies significantly across sectors depending on their exposure to global markets (Chemical Business, June 2012).
- Moderate Depreciation Can Support Economic Adjustment
Acharya presents Rajan’s perspective that a controlled decline in currency value can help improve export competitiveness and balance trade. Rather than being purely negative, moderate depreciation may support economic adjustment when managed carefully through disciplined policy measures. This view highlights that exchange rate flexibility can sometimes act as a stabilizing mechanism (Acharya, February 13, 2016).
- Crossing 90 Per Dollar Increased Market Nervousness
Vajpayee and Makol associate the rupee crossing the 90-per-dollar level with increased volatility driven by investor expectations and trade deficits. Symbolic thresholds can influence market psychology and intensify currency movements beyond fundamental economic factors. This demonstrated how investor perception can amplify real economic pressures (Vajpayee & Makol, December 2, 2025).
Conclusion
The depreciation of the Indian rupee resulted from a combination of trade imbalances, foreign investment outflows, and global financial uncertainty. While policymakers attempted to stabilize the currency through intervention and strategic adjustments, the situation exposed structural vulnerabilities linked to dependence on external capital and imports. Achieving long-term stability will require balanced trade relationships, diversified investment sources, and strong macroeconomic management to reduce exposure to global shocks.
References
Acharya, N. (2016, February 13). Rajan says some rupee depreciation needed until inflation falls. Bloomberg.com.
Chemical Business. (2012, June). Nuclear Power Corporation not affected by rupee depreciation: Official. Chemical Business, 26(6), 49.
Dutta, B. (2025, December 11). Indian rupee falls to new record low on outflows, trade impasse. Bloomberg.com.
Dutta, B., & Vajpayee, P. (2025, December 2). Indian rupee nears key 90 per dollar mark as trade impasse bites. Bloomberg.com.
Joshi, A. (2025, December 15). Rupee rout dims hopes of a strong recovery in Indian stocks. Bloomberg.com.
Roy, A., & Sircar, S. (2025, December 4). Rupee’s slump complicates RBI’s path to rate cut: Decision guide. Bloomberg.com.
Sircar, S. (2026, January 16). Indian rupee slides to one-month low as stock outflows rise. Bloomberg.com.
Sircar, S., & Makol, M. K. (2026, January 21). India’s RBI to focus on pace of rupee’s drop, strategists say. Bloomberg.com.
Vajpayee, P., Dutta, B., Roy, A., & Sircar, S. (2025, December 7). Sell $100 million every minute: Inside India’s rupee defense. Bloomberg.com.
Vajpayee, P., & Makol, M. K. (2025, December 2). Indian rupee falls past 90 per dollar as trade stalemate weighs. Bloomberg.com.