India
is advancing rapidly with Q2 GDP figures reinforcing its status as world’s
fastest growing economy. Many institutions have expected it to grow by at least
6.5-7 per cent this year, driven by strong institutional reforms accelerating
demand and investments. Yet the rupee is depreciating, creating the Rupee-Growth
Paradox
Let’s
dig deeper-
Why is the rupee depreciating?
Import Dependencies
Presently,
India’s growth model is driven by consumption and investments. Demand for crude
oil, electronics, machinery, chemicals, defence equipment etc widens our import
bill. Even the strong services trade surplus is able to finance only 48 per
cent of the high and rising merchandise trade deficit.
(Source: Ministry of Commerce and Industry, India)
High Interest Rates in US
Interest rates in
US have recovered post COVID to be in the range of 3-4 per cent, making US assets
attractive again. This causes capital to flow to US in dollar denominated bonds
because yield is high and risk is low, strengthening US dollar and pulling way
funds from emerging markets.
The graph below shows that despite cuts in US interest rates since April 2024, it remained high enough to attract foreign capital into US assets. The rupee continued to depreciate during the same period, highlighting that US monetary policy stance shapes currency of emerging markets like India.
Why strong Indian economy has a depreciating rupee?
The Rupee-Growth Paradox
a. Strong
Imports - Economic growth
leads to rise in demand for more goods be it consumer goods or capital goods.
This leads to a rise in imports of components, energy and other manufactured
products. In the process, the demand for dollar increases, leading to weakening
domestic currency.
GDP Growth ↑ → Imports of raw materials ↑ →
demand for dollar ↑ → depreciating rupee
b. Lagged Exports - Despite rising imports of raw materials, manufacturing capacities and supply chain integration needs time to expand beyond fulfilling domestic needs. The exports rises but at a slower rate leading to widening of Current Account Deficit and depreciated rupee.
c. Rising but insufficient Foreign Direct Investments - Though FDI into India is rising at an increasing rate, yet US high interest rates along with safe and stable investments gather investors trust, causing the capital flows into India hardly sufficient to offset the rising Import bill.
Also Read: https://www.policyprism02.in/2025/12/g20-summit.html
Conclusion
This
pattern is visible in all major economies. When a country experience growth,
import demand rises more vigorously than the export capacities especially
during the heavy investment phases. In India, the focus in the recent years has
been to expand its manufacturing capabilities via foreign investments to
integrate into global supply chains. Overall, a depreciating Indian rupee
signals India’s transition to a high growth and investment phase driven by strong
consumption and expanding infrastructure. In other words, rupee is not collapsing
but it is adjusting to support India’s growth story.
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