A Decade of Rupee Depreciation: Why This Time Was Different

Between 2015 and 2025, the Indian rupee depreciated from approximately ₹63 per US dollar to around ₹88–90, implying a cumulative nominal depreciation of about 40–43% over a decade. While the magnitude appears large, the pace, volatility, and macro-financial context of this adjustment differ materially from earlier episodes of rupee weakness. Unlike past periods, the depreciation during 2015–2025 has been gradual, orderly, and largely decoupled from acute balance-of-payments stress.

The analytical interest of this episode lies in the coexistence of two trends that historically would have been associated with instability. India’s merchandise trade deficit widened sharply in absolute dollar terms, particularly after 2021, yet the exchange rate adjusted at a relatively steady pace of 3.5–4% per annum. The absence of abrupt breaks or crisis dynamics suggests that the depreciation reflects structural adjustment rather than external vulnerability.

Earlier episodes provide a useful contrast. During the global financial crisis of 2008–09, the rupee depreciated from around ₹40 to over ₹52 within a year. This movement was abrupt, driven by a collapse in global dollar liquidity and capital flows, and amplified by limited reserves and shallow external buffers. The adjustment was crisis-driven and externally imposed.

The 2011–13 period more clearly reflected balance-of-payments stress. The merchandise trade deficit rose to around $190 billion, the current account deficit approached 5% of GDP, inflation remained elevated, and policy credibility weakened. The rupee depreciated from roughly ₹45 to nearly ₹68 per dollar in less than two years, accompanied by high volatility and unanchored expectations. Notably, the absolute size of the trade deficit during that period was smaller than in the early 2020s, yet the currency response was far more severe.

Against this background, the post-2015 experience stands out. From 2015 to 2019, India’s merchandise trade deficit remained broadly stable in the $120–160 billion range. The pandemic year of 2020 saw a temporary compression of imports. From 2021 onward, the deficit widened sharply, reflecting higher energy prices, a rebound in domestic demand, and increased imports of capital goods and electronics. By 2022–25, annual deficits frequently reached $230–300 billion.

Historically, deficits of this magnitude would have been expected to trigger significant exchange rate stress. Instead, the rupee depreciated in a measured fashion—from about ₹74 in 2020 to around ₹82 by 2022–23 and into the high-80s by 2025—without disorderly overshooting. This divergence between trade deficit size and exchange rate behavior is the defining empirical feature of the current episode.

One explanation lies in the composition of the external account. Since the mid-2010s, India’s services exports, particularly in information technology and business services, have expanded steadily, generating a large and persistent services surplus. By the early 2020s, net services exports often offset $90–120 billion of the merchandise trade deficit annually. Strong and stable remittance inflows further supported the current account, reducing reliance on volatile short-term capital flows.

A second differentiating factor has been the evolution of exchange rate management. Over the past decade, the Reserve Bank of India has increasingly emphasised limiting excessive volatility rather than defending specific exchange rate levels. This framework has allowed the rupee to adjust gradually in response to macroeconomic fundamentals, while discouraging one-way speculative positioning.

Over the most recent year, this approach has been particularly evident. Despite heightened global uncertainty from tighter financial conditions and geopolitical risks, the rupee’s movement has remained orderly. RBI intervention has been calibrated and liquidity-oriented, aimed at smoothing excessive short-term volatility rather than resisting underlying trends.

Structural changes in foreign exchange markets have reinforced this outcome. Measures permitting bank participation in offshore non-deliverable forward markets, alongside the expansion of INR derivatives trading at the IFSC in GIFT City, have reduced onshore–offshore segmentation and improved price discovery.

Foreign exchange reserves provide an additional layer of differentiation. From around $275 billion in 2013, reserves rose steadily after 2015, peaking above $640 billion in 2021 and remaining close to $600 billion by 2025. While reserves are not intended to defend a fixed exchange rate, their scale reduces perceived tail risk.

India’s increasing integration with the global economy has also shaped exchange rate dynamics. Trade openness has risen, financial linkages have deepened, and Indian firms are more embedded in global supply chains and capital markets.

In this context, corporate foreign currency exposures warrant attention. The RBI’s Financial Stability Report indicates that around 45–46% of outstanding external commercial borrowings were unhedged as of end-March 2023, even after accounting for natural hedges, though vulnerabilities are concentrated among larger firms with stronger balance sheets(1). IMF Article IV assessments similarly note resilience to moderate depreciation while flagging pockets of risk(2).

These developments naturally raise the question of whether India should move toward faster and fuller capital account convertibility. Greater tolerance for exchange rate movement is a necessary condition for such a transition, as freer capital flows require the exchange rate to act as the primary shock absorber. Recent experience suggests that India’s economy and financial system have developed a greater capacity to absorb exchange rate movements without destabilisation.

At the same time, a balanced assessment argues against rapid or unconditional liberalisation. Fuller convertibility would amplify capital flow volatility and expose balance sheets to sharper exchange rate swings. While deeper markets, stronger reserves, and improved policy credibility provide buffers, remaining unhedged exposures and the still-developing depth of domestic bond and derivatives markets argue for caution.

A gradual approach—characterised by wider tolerance for exchange rate movement, continued volatility management, and sequenced liberalization of outward capital flows—appears more consistent with financial stability. Such an approach allows market participants to internalize currency risk while preserving the RBI’s capacity to address disorderly conditions.

The rupee’s depreciation over 2015–2025 reflects a slow and predictable adjustment to global conditions rather than acute external fragility. While this experience supports greater exchange rate flexibility as a step toward fuller capital account convertibility, it also underscores the importance of sequencing, prudential safeguards, and institutional readiness in any future reform agenda.

References:
1. Reserve Bank of India. Financial Stability Report. Various issues.
2. International Monetary Fund. India—Staff Report for the Article IV Consultation. Various years