Rupee vs Dollar: Decoding the 4.88% Depreciation from 2023 to 2025

 February 23, 2024

New Delhi, India

Rupee Analysis

The Indian rupee (INR) has experienced a notable depreciation against the US dollar (USD) from 2023 to February 2025, reflecting a complex interplay of global and domestic economic factors. This analysis delves into the exchange rate trends, the extent of depreciation, and the underlying causes, providing a detailed examination for stakeholders interested in currency dynamics and economic policy.

Historical Context and Exchange Rate Data

The INR’s performance against the USD is a critical indicator of India’s economic health, given the country’s significant trade and investment ties with the US. Historical data reveals:

• • January 2023 Baseline: On the first trading day of 2023, the INR opened at approximately 82.66 per USD, as reported by CNBC TV18.

• • February 2025 Current Rate: By February 24, 2025, the exchange rate had risen to 86.6930 INR per USD, according to Trading Economics.

To quantify the depreciation:

• • Change in value: 86.6930 – 82.66 = 4.033 INR per USD.

• • Percentage depreciation: (4.033 / 82.66) * 100 ≈ 4.88%.

This 4.88% depreciation over two years indicates a gradual weakening, contrasting with sharper declines in previous years, such as the 11% drop in 2022.

Detailed Factors Contributing to Depreciation

The depreciation can be attributed to a range of factors, each with varying degrees of impact:

1. 1. Global Economic Uncertainties:
      • • Geopolitical tensions, including the Russia-Ukraine war and the Israel-Hamas conflict, have increased global risk aversion, driving demand for the USD as a safe haven currency. This is evident from reports on DrishtiIAS.
      • • The lingering effects of the COVID-19 pandemic have contributed to economic instability, reducing investor confidence in emerging markets like India, as noted in Investopedia co in India.

1. 1. Trade Imbalances:
      • • India’s economy is heavily reliant on imports, particularly for crude oil, edible oils, and pulses. This reliance has increased USD demand, exacerbating trade deficits. Policy Circle highlights that rupee depreciation could add $15 billion to India’s import bill if external factors persist.
      • • The widening trade deficit, driven by higher import costs, has put additional pressure on the INR, as discussed in Insightsonindia.

1. 1. US Dollar Strength:
      • • The US Federal Reserve’s monetary tightening, including interest rate hikes, has strengthened the USD. This is reflected in the dollar index appreciating by more than 7% in recent quarters, as per The Economic Times.
      • • The safe haven appeal of the USD during global uncertainties has further appreciated it against the INR, impacting emerging market currencies disproportionately.

1. 1. Capital Outflows:
      • • Foreign portfolio investment (FPI) outflows have been significant, with investors shifting funds to developed markets offering better returns. This reduction in USD supply in India has contributed to rupee depreciation, as noted in Bank of Baroda’s analysis via Reuters.
      • • The narrowing interest rate differential between the US and India has also discouraged capital inflows, adding to the pressure.

1. 1. RBI Interventions and Domestic Policies:
      • • The Reserve Bank of India (RBI) has actively intervened in the forex market to stabilize the rupee, absorbing inflows and managing volatility. Despite these efforts, external pressures have often overwhelmed domestic measures, as seen in Livemint.
      • • The RBI’s strategy has included building foreign exchange reserves, which peaked at $704 billion in September 2024, but reserves fell subsequently, contributing to depreciation, according to The Economic Times.

Significant Events and Trends

Several key events marked the period from 2023 to 2025:

• • 2023 First Half: The rupee traded within a broad range of 81.60-83.05, with RBI interventions near the lower end, as per CNBC TV18. Global factors like the banking crisis and Fed rate hikes impacted the currency, but domestic fundamentals provided some stability.

• • 2024 Volatility: The rupee hit a record low of 85.80 per USD in 2024, driven by US election uncertainties and anticipated policies under Donald Trump, as reported in The Economic Times.

• • Early 2025: The rupee continued to face pressure due to a strong USD and potential interest rate cuts, with traders expecting it to weaken to 86.50 by March 2025, according to Livemint.

Impact on the Indian Economy

The depreciation has had mixed effects:

• • Inflation: Higher import costs, especially for oil and commodities, have contributed to inflationary pressures, reducing the real value of the rupee, as noted in Insightsonindia.

• • Export Competitiveness: A weaker rupee could theoretically boost exports by making Indian goods cheaper abroad, but the overall trade deficit and global demand conditions have limited this benefit.

• • Foreign Debt: Indian companies and the government face increased costs for servicing foreign debt, as the INR’s value decline raises the INR equivalent of USD-denominated obligations.

Comparative Analysis

Interestingly, despite the depreciation, the INR has shown resilience compared to other Asian currencies, with lower volatility. This is attributed to RBI’s proactive measures and India’s robust GDP growth, forecasted at 6.8% in 2023, as per Reuters. This relative stability is a surprising detail, given the global pressures.

Future Outlook and Predictions

Looking ahead, the rupee is expected to remain under pressure in the near term due to persistent global uncertainties and the US Fed’s policies. However, India’s strong domestic growth and RBI interventions may help stabilize the currency over the long term. Analysts forecast the INR to trade within the 83.50-84.00 range in 2025, with potential appreciation to 81.50 by 2026, as per Capex.

Conclusion

The depreciation of the Indian rupee from 2023 to February 2025, amounting to approximately 4.88%, is a result of a confluence of global economic uncertainties, trade imbalances, and US dollar strength, mitigated partially by RBI interventions. This analysis underscores the importance of monitoring currency dynamics for economic planning and highlights the INR’s relative resilience amidst volatility.