Indian Rupee Ends Year Weakest Among Major Asian Currencies

In 2025, the Indian rupee depreciated by about 4.7%, marking its worst annual performance in three years. It closed the year near ₹89.87 per U.S. dollar, making it the weakest-performing currency among major Asian peers.

Key Reasons for Depreciation

• Persistent foreign portfolio investor (FPI) outflows, driven by higher global interest rates and risk aversion.
• Trade uncertainty, particularly the absence of a comprehensive trade agreement with the United States, affecting export and investment sentiment.
• A strong U.S. dollar, supported by tight monetary policy in advanced economies.
• Elevated import bills, especially for energy and critical commodities, widening the current account deficit pressures.

Role of the RBI

• The Reserve Bank of India allowed greater exchange rate flexibility, intervening only to smooth excessive volatility rather than defend a specific level.
• This approach helped absorb external shocks while preserving foreign exchange reserves.
• RBI’s stance aligns with a market-determined exchange rate regime under a managed float system.

Economic Implications

• Positive:
  • Enhances export competitiveness and supports services exports like IT and remittances.
• Negative:
  • Increases imported inflation, particularly fuel and fertilisers.
  • Raises the cost of external commercial borrowings and foreign debt servicing.

Way Forward

• Strengthening export diversification and value-added manufacturing.
• Attracting stable long-term capital flows such as FDI.
• Maintaining macroeconomic stability through fiscal prudence and inflation control.

Conclusion

The rupee’s depreciation in 2025 reflects broader global financial tightening and trade uncertainties rather than domestic macroeconomic fragility alone. A flexible exchange rate, combined with structural reforms and external sector resilience, remains key to managing future currency pressures.