Rupee Slide: Hurt Economic Recovery Prospects


By Pralok Gupta and Mridula Sharma

As India’s economy has shown signs of recovery over the past few quarters, the exchange rate has taken another hit. The Rupee broke through the psychological barrier of 80 against the US Dollar. The rupiah was constantly under pressure since the beginning of the Russian-Ukrainian war.

However, the currency’s recent slump is mostly attributed to foreign investors pulling their money out of Indian markets after the US Fed announced rate hikes. A depreciating rupee will hurt the recovery prospects of the national economy, which is already reeling from the Covid pandemic and the war crisis in Ukraine.

Effects of Rupee Depreciation on Exports and Imports: What Economic Theory Says

A depreciating currency is useful for increasing exports and controlling imports. Currency depreciation increases the competitiveness of exports in international markets by lowering the unit price of exports in dollars. On the other hand, imports become more expensive, which decreases the domestic demand for imported products.

The actual impact of a depreciating currency depends on the elasticity of exports and imports, that is, the responsiveness of demand for exports and imports to price changes. If imports are inelastic in nature, depreciation can harm exports and the economy as a whole. Let’s understand this in the context of the Indian economy.

High import dependence of the Indian economy

India’s main import products are petroleum products, gold, coal, diamonds, electronic integrated circuits, automatic data processing machines and palm oil. These products accounted for nearly half of India’s total imports in the previous fiscal year and in May 2022, the latest month for which trade data is available (see charts). For most of these products, India is highly dependent on imports given the lack of adequate domestic production.

For example, India is the world’s third largest oil consumer and importer, with over 85% dependency on imports to meet its crude oil needs. Similarly, the coal sector in India has recently experienced supply and demand mismatches, resulting in a substantial reliance on imports – over 25% of domestic consumption. For gold, imports accounted for 86% of India’s total supply between 2016 and 2020, according to the World Gold Council report. For edible oils, India covers 55 to 60% of its needs through imports. This heavy dependence on imports is expected to increase India’s import bill in the face of the sharp depreciation of the rupee.

How the rupee is doing against other currencies

In order to understand whether the current depreciation of the rupee is more due to external factors or to certain weaknesses in the Indian economy, let us compare the evolution of the Indian rupee against other major world currencies. If we compare the changes in the exchange rates of the main world currencies, namely the US dollar during the last 45-day period (between June 1 and July 14, 2022), we have found that the most depreciated currency by against the US dollar was the Japanese yen, followed by the Canadian dollar and the Indian rupee. In contrast, the Euro, British Pound and Australian Dollar appreciated against the US Dollar during this period (see chart). If we compare the exchange rates of the Indian rupee against all these currencies during the same period, we found that except for the depreciation against the US dollar and the Chinese yuan, the Indian currency s appreciated against all major currencies during this period. This indicates that the current decline in the rupee is more related to external factors and less attributed to intrinsic weaknesses within the economy.

What awaits us

Rate hikes are expected by the US Fed in the coming days, which will further accentuate the outflow of foreign institutions from India, thus continuing the downward pressure on the Indian rupee. This will have adverse effects on the Indian economy.

The high dependence and inelastic nature of India’s imports will result in import demand remaining at roughly the same level despite high import prices. This risks increasing import bills and putting pressure on importers. Exports, however, will gain competitiveness after the depreciation of the rupee, they may not see a significant increase given the weak global demand and the lack of purchasing power after the pandemic and the war in Ukraine. Export competitiveness may also experience an opposite trend in import-dependent export industries, such as pharmaceuticals and automobiles, due to the high costs of imported inputs.

The RBI’s decision to allow international trade settlement in Indian rupees may provide some relief from the depreciation frenzy. However, the effects of this mechanism are likely to occur in the long term and not immediately. In addition, they will depend on the availability of foreign trading partners willing to settle their trade in rupees.

Rupee depreciation will further aggravate inflationary pressure on the Indian economy, especially if there is no softening in crude oil prices in international markets. If Crude Oil stays above $100 a barrel and the Rupee trades around 80 against the USD, higher domestic oil prices will be inevitable. Therefore, given the role of external factors in the current depreciation of the rupee, let us prepare for the difficult times ahead.

(Pralok Gupta: Policy Leader Fellow, European University Institute, Florence and Associate Professor, Center for WTO Studies, IIFT, New Delhi. Mridula Sharma, Research Associate, Center for WTO Studies, IIFT, New Delhi. Opinions are personal.)


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