Mentor’s Comment

India’s recent 7% rupee depreciation has revived an uncomfortable truth, monetary tools alone cannot stabilise the currency when structural vulnerabilities remain unaddressed. The article examined today highlights India’s long-standing dependence on oil imports, the RBI’s limited manoeuvring room, and why external pressures have outweighed domestic macro stability. For UPSC aspirants, this topic offers rich intersections across macroeconomics, external sector management, energy security, inflation dynamics, trade policy, and structural reforms.

Introduction

India’s rupee has depreciated about 7% between late November 2024 and now, sliding from ₹83.4/$ to nearly ₹89.2/$. Despite large-scale RBI intervention, including selling nearly $50 billion in forex, the currency continues to weaken amid external pressures. The episode mirrors the 2018 phase of global dollar strength and U.S. interest rate hikes, exposing India’s long-standing vulnerability: heavy dependence on expensive crude oil imports. With crude forming more than one-fifth of total imports, and India transitioning away from Russian supplies, monetary stabilisation alone is insufficient.

Why in the News 

The rupee has dropped nearly 7% to ₹89.2 per dollar, even after the RBI sold $50 billion to stabilise it. This mirrors the 2018 downturn when global dollar strength and U.S. rate hikes triggered similar pressure. What makes this episode striking is the contradiction: inflation is low (0.25% in Oct 2025), forex reserves remain comfortable at $693 billion, yet the rupee continues to slide. The rapid fall highlights India’s structural weakness, oil import dependence, which raises the current-account deficit and inflation risks despite favourable domestic conditions.

What Explains the Recent Rupee Depreciation?

1. Global Dollar Strength: Mirrors 2018 trends where strong U.S. interest rates and trade tensions pressured emerging market currencies.
2. Widening Current Account Deficit: Rising bullion imports as a hedge in uncertain times widened the CAD.
3. Exporter Competitiveness Issues: Exporters struggled to maintain margins due to high U.S. tariffs, increasing pressure on the INR.

Why Are RBI Tools Proving Insufficient?

1. Floating-but-Managed Regime: RBI can only “smoothen volatility”, not fix the rate.
2. Forex Market Intervention: RBI sold nearly $50 billion, yet depreciation continued, signalling strong external headwinds.
3. Liquidity Supports via Swaps:
   1. 2018: First longer-term currency swap as a systemic liquidity check.
   2. 2019: Completed a $5 billion three-year swap.
   3. Feb 2025: Conducted a $10 billion buy-sell auction to infuse long-term rupee liquidity.

Why Is This Rupee Slide Concerning Despite Low Inflation?

1. Exceptionally Low CPI Inflation: Headline CPI at 0.25% (Oct 2025), well below RBI’s 2-6% band, should normally support the rupee.
2. Transition-Induced Cost Pressures: Shift from cheaper Russian crude toward costlier U.S. imports exerts upward pressure.
3. Risk of Imported Inflation: Higher oil prices raise logistics, manufacturing, and CPI components.

Why Must India Reduce Dependence on Oil Imports?

1. Over One-Fifth of FY25 Imports Are Crude: A single commodity dominates the import basket, creating vulnerability.
2. Rupee-Oil Linkage: Any crude price rise automatically weakens the rupee by widening CAD.
3. Limited Monetary Space: Rupee stabilisation cannot rely solely on forex intervention or interest rate changes.

What Structural Reforms Are Needed?

1. Faster Transport Electrification: Must be treated as a strategic imperative, not a long-term aspiration.
2. Holistic Trade Policy: India’s bilateral deals (Japan, UAE, ASEAN) have tilted the trade balance against it, offering limited diversification of energy trade routes.
3. Reduced Oil Intensity in GDP: Accelerating renewable capacity, green hydrogen, and domestic energy alternatives.

Conclusion

The current rupee slide highlights a deeper structural flaw: India’s dependence on oil imports exposes it to global price volatility and external shocks. With RBI intervention offering only temporary relief, sustainable currency stability requires reducing crude dependence, reforming trade strategy, and accelerating energy transition. Unless structural measures address the root vulnerability, India cannot insulate the rupee from future external pressures.

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