By T N Ashok
When India overtook Britain to become the world’s fifth-largest economy, policymakers celebrated a milestone that had been decades in the making. Official growth numbers showed an economy expanding at 6.5 to 7 percent, far outpacing a global slowdown stuck near 3 percent. Yet even as India’s GDP surged, its currency told a very different story.
By late 2025, the Indian rupee had slid toward ₹90 to the U.S. dollar, marking one of the steepest long-term depreciations among major emerging-market currencies. Two decades earlier, when Manmohan Singh was prime minister, the rupee traded near ₹50. The erosion has been steady, persistent, and deeply unsettling.
How does an economy that claims to be among the world’s fastest-growing preside over one of its weakest currencies? The answer lies not in a single policy failure but in a convergence of global finance, trade shocks, capital flows, and structural imbalances—many of which intensified between 2023 and 2025, culminating in the return of Trump-era tariffs that reshaped India’s export calculus.
In theory, fast-growing economies attract capital, strengthen confidence, and support their currencies. In practice, GDP growth and exchange rates have become increasingly decoupled in a world dominated by mobile capital, geopolitical risk, and U.S. dollar supremacy.
India’s growth story in the 2020s was real—but uneven. Consumption rebounded after the pandemic, infrastructure spending accelerated, and corporate profits rose. What growth did not do was resolve India’s deep dependence on foreign capital and imported inputs.
“The mistake is to treat GDP growth as a currency anchor,” said a former IMF economist now advising central banks in Asia. “Currencies are driven by balance-of-payments realities, not headline growth.”
India’s balance-of-payments problem never disappeared—it merely changed. The most powerful force weighing on the rupee has been the relentless strength of the U.S. dollar. From 2022 onward, global investors piled into dollar assets amid: higher U.S. interest rates, geopolitical instability, and fears of recession in Europe and China.
The Federal Reserve’s tightening cycle made U.S. Treasury yields irresistible compared with emerging-market risk. As capital flowed into dollar assets, currencies from Brazil to Indonesia weakened. India was no exception. But India was uniquely vulnerable because of its large financing needs. Every bout of global risk aversion triggered portfolio outflows from Indian equities and bonds, forcing the rupee lower.
Between 2023 and 2025, foreign institutional investors repeatedly exited Indian markets, converting rupees back into dollars and amplifying depreciation pressure. The rupee’s decline accelerated sharply after the re-imposition of punitive U.S. tariffs under President Donald Trump’s second term.
Citing India’s purchases of Russian oil and strategic autonomy on sanctions, Washington imposed tariffs that made Indian exports—particularly in engineering goods, textiles, chemicals, and auto components—less competitive in the American market, India’s largest export destination. For Indian exporters already battling weak global demand, the tariffs were devastating. Exports stagnated. Trade receipts softened. And currency markets took notice.
“A currency weakens when future dollar earnings look uncertain,” said a U.S. trade analyst who advises multinational manufacturers. “Trump’s tariffs told markets that India’s access to the U.S. market could no longer be taken for granted.”
The irony was stark: India’s GDP continued to grow, driven by domestic spending, while its external sector quietly deteriorated. If exports were under pressure, imports were booming. India’s growth model remains heavily dependent on imported: crude oil and gas, electronics and semiconductors, and machinery and capital goods.
As domestic demand rose, so did the import bill. Every barrel of oil, every smartphone component, every industrial machine required dollars. The result was a persistent current-account deficit, even during periods of high growth. That deficit had to be financed—either by foreign investment or by drawing down reserves.
When capital inflows slowed, the rupee took a hit. “India has not yet built an export engine strong enough to pay for its own growth,” said a senior Indian trade economist. “That gap shows up in the exchange rate.”Orthodox economics suggests that a depreciating currency should boost exports by making them cheaper. But India’s experience exposed the limits of that logic.
Indian manufacturing is deeply embedded in global supply chains. Many exporters import components priced in dollars. When the rupee falls, input costs rise, cancelling out any competitive gain. In sectors like electronics, pharmaceuticals, and chemicals, depreciation increased costs faster than it increased export volumes. The rupee fell—but exports did not surge.
The Reserve Bank of India faced a delicate trade-off. Defending the rupee aggressively would have required: sharply higher interest rates, tighter liquidity, and slower growth. Instead, the RBI chose managed flexibility—intervening to prevent disorderly swings, but allowing the rupee to find a lower equilibrium. Officials argued that burning reserves to defend a specific level would be futile in the face of global dollar strength. “The central bank’s message was clear,” said a former RBI official. “We will smooth volatility, not fight markets.”That policy avoided a crisis—but it also institutionalised depreciation as a feature, not a bug.
The comparison with the Manmohan Singh era is politically charged but economically revealing. In the early 2000s: India’s trade deficit was smaller, capital inflows were more stable, and globalisation was expanding, not fragmenting. Today’s world is defined by protectionism, financial volatility, and geopolitical rivalry. India’s economy is far larger—but also far more exposed.
The rupee’s slide from ₹50 to nearly ₹90 is not simply a verdict on governance. It reflects how emerging economies are priced in a dollar-dominated system, where growth does not guarantee currency strength.
The rupee’s decline is not a collapse—but it is a warning. It signals: dependence on volatile capital, unresolved trade imbalances, and vulnerability to geopolitical shocks. India’s economy may be growing—but it is growing on external terms set elsewhere.
As one European central-bank adviser put it: “India has scale, talent, and momentum. What it lacks is insulation from the dollar cycle. Until that changes, the rupee will remain under pressure—no matter how impressive the GDP numbers look.”
The rupee’s long fall forces a question policymakers rarely confront openly: Is India willing to redesign its growth model to earn its dollars—or will it continue to borrow them from the world’s patience? The answer will determine not just the future of the rupee, but the credibility of India’s rise as an economic power. (IPA Service)
