The Falling Rupee: A Crisis in Slow Motion

Introduction : From 3 rupees to nearly 96 rupees per  US dollar , India's currency has lost  97% of its value since independence. What explains this relentless fall and what does it mean for the world’s most populous country? When India was newly independent, 1 US dollar was purchased  for about three rupees . Now, that number is close to 96 rupees per dollar, nearly 30 times more. As noted by DOT News, this isn’t just a sudden crash; it’s a long-term decline that’s been accumulating over decades. The erosion of the Indian Rupee (INR) intensified in 2025, so much so that The Hindu called it Asia’s worst-performing currency.

The rupee’s fall isn’t a new issue, but the speed at which it’s happening has certainly increased. From 2014 to 2026, the value of the dollar  has increased from ₹62.33  to  ₹96  per dollar in  just over 10 years. The rupee is falling not just against dollars but also in Euro and British Pound, which indicates a more global decline than just against one currency. In 1947, 1 USD = 3.30 INR,  in 2014, it was 62.33 rupees per US dollar, 2025 was between 84–86 INR/ dollar  and in 2026 it jumped to 95.78 rupees per US dollar. Why is the rupee falling? Here are six primary causes why the rupee keeps depreciating:

1. Latest data released by the Oil Ministry's Petroleum Planning & Analysis Cell (PPAC) indicated that India's dependence on crude oil imports was 88.4% between April to September 2025. Oil is sold in dollars therefore, every barrel of oil India consumes takes dollars away from the system. This is arguably the biggest structural driver of the current account deficit.

2. The rupee is weakening as the US dollar strengthens, Finance Minister Nirmala Sitharaman admitted. When the US Federal Reserve keeps interest rates high, global capital rushes into dollar-dominated assets and the demand for emerging market currencies like the rupee falls. Moreover, in periods of extreme geopolitical turbulence like the tensions between Iran and the US, this structural pressure is greatly exacerbated. Fearing economic fallout, global investors are placing safer bets and aggressively pouring capital into the dollar, maintaining the currency as a “safe haven” and prompting a quicker depreciation in emerging-market currencies.

3. Foreign investors continued to pare their exposure to Indian equities, withdrawing ₹62,800 crores so far this month, indicating cautiousness among global investors amid an evolving global macroeconomic and geopolitical environment. With this, total outflows by Foreign Portfolio Investors (FPIs) from the equity market have reached ₹2.87 lakh crores in 2026, higher than the ₹1.66 lakh crores pulled out during the entire 2025, according to data with the National Securities Depository Ltd. (NSDL).

4. The trade deficit in India widened to $28.4 billion in April of 2026 from $27.1 billion in the corresponding period of the previous year, the highest on record for the period. Imports jumped by 10% annually to $71.9 billion, the highest on record for the period, lifted by the surge in oil, fuel, and coal prices due to the war in the Middle East. The jump in foreign purchases continued to pressure the rupee, forcing the RBI to tame the currency's decline. Meanwhile, higher goods prices also lifted exports, with foreign sales rising 13.8% to $41.6 billion, the second highest reading on record and the highest for the period. While this is positive, it was heavily driven by inflation (higher global prices) rather than just selling higher volumes, which is why it wasn't enough to offset the massive import bills. 

5. Debt service obligations represent a substantial share of India's dollar outflows, channeled toward repaying external borrowings. These are fixed financial commitments. They remain due regardless of whether the rupee strengthens or weakens  and they exert persistent pressure on the country's foreign exchange reserves. Over time, the burden of servicing international debt leaves very little funds for productive capital formation, risking a cycle where the economy borrows not to grow, but merely to repay  a classic debt trap.

6. India has an import-led economic structure, in basic terms an import-dependent economy. Contrary to  export-led economies such as China or South Korea, India's growth is driven primarily by domestic consumption; it is considered an important economy because of its domestic demand. This means that the economy is producing less dollar inflow to offset its outflows, leaving the rupee vulnerable to external shocks. "The Rupee is Asia's worst performing currency with a sharp fall." —The Hindu

What this means for every Indian

A weakening rupee is not just a financial abstraction,  it touches our daily life. Crude oil is dollar-denominated and the price of petrol and diesel goes up. Electronic appliances, medication, fertilizers and gold from abroad get more expensive, inflation inches up. Students studying abroad and families with dollar bills feel squeezed. The picture for businesses is mixed. Exporters especially in IT services, textiles and pharmaceuticals make an equal amount of rupees per dollar of revenue, giving them a competitive advantage. But as manufacturers increasingly depend on imported inputs, they can experience cost pressures that eat into margins. The larger issue is one of confidence.

Persistent depreciation of a currency can trigger a cycle: investors anticipate continued depreciation and therefore outflows money, which in turn results in further depreciation. India’s foreign exchange reserves, controlled by the Reserve Bank of India, act as the main line of defense against this spiral  but they are limited. Is there a way out? In term one, the only solution will be to reduce structural vulnerabilities: increase internal energy production and renewable energy sources, decreasing reliance on oil imports, increase exports with an eye on the PLI schemes, which focus on high value manufacturing, and deepen financial markets to lure stable, long-term-foreign investment  not erratic portfolio flows. In the short run, the RBI can intervene either in the form of selling dollars from foreign exchange reserves or by increasing interest rates to increase the attractiveness of rupee assets.

But these are tools of management not cures. The basic math of a huge current account deficit funded by capital flows that can revert quilibrated and endless will sustain pressure on the rupee as long as India imports far more than it exports. A depreciation of the rupee is the symptom of a deeper structural story, an economy that sugars and imports profligately but has yet to build an exporting engine to match. Until that balance changes, the rupee will remain susceptible to global dollar dynamics and Indian policy makers will devote immense energy to managing a relatively slow, steady slide instead of rebalancing it.

Steps the Indian Government Must Take to Stop Rupee Slide

India is the world’s sixth largest economy, but the rupee fell 4.3 % in 2025 and 7% in the the past 5 months  this year and nearly 60 percent against the dollar in the past 14 years. Exports have also slumped from 25% to 21% of GDP. Statistics of growth are covering an unprecedented crisis for ordinary people. The most rapidly developing big economy is, paradoxically, impoverishing its people.

The Import Problem

India’s chronic dependence on imports remains the greatest structural driver of rupee weakness.  India imports 800 tonnes of gold yearly but manufactures only 1 tonne domestically. This alone accounts for enormous forex outflow. The government has continuously increased  import duties on gold from 9.2 % to 18.4%  but physical demand of gold still remains the same, this has driven  significant rise in illicit smuggling operations and simulated an unobserved economy. The government should also push sovereign gold bonds to encourage consumers to choose paper over physical gold and impose stringent domestic recycling standards, instead of just escalating tariffs.

In like manner, urea consumption is at 40 million tonnes /year, out of which 30 million tonnes is imported. Increasing production of domestic fertiliser and increasing the uptake of urea would offset this drain on foreign exchange reserves. Recovery of exports is non-negotiable. Indian Rupee(INR)  which has plunged 60% should make massively cheaper and competitive exports in the market  instead  the exports are  declining. This suggests deep-rooted structural failures in such sectors as manufacturing, logistics and trade infrastructure. The government urgently needs to expand PLI schemes for high-value sectors, bring down the cost of logistics and make new trade agreements. Semiconductors are one of the biggest import categories today  however, with the right investment in infrastructure and designing incentives, India can reverse this deficit to an export strength. 

To have self sufficient resources does not have to mean, in having it all within the Indian borders, the Government must aggressively pursue captive capacities in foreign mineral reserves as China has done across Africa and Latin America ensuring supply security without being held hostage to global price volatility.  India should own assets in resource rich nations rather than remaining a passive buyer in global markets.

The Freebies Crisis : Spending That Erodes the Rupee

A gigantic proportion of the Government’s revenue comes from direct and indirect taxes, which helps the Government to pay for interest on loans that it has taken, defence, non-recurring expenses, the salaries of government workers, subsidies, and schemes including healthcare, education, and social security for the public. These schemes are fixed and a part of the government’s total expenditure is spent on them. When the state implements these schemes, the money for implementation comes from the Centre, which in turn comes from the taxes that we pay.

Subsidies, in simple words, are discounts on certain essential items for the public like food, gas, and education. States need to be cautious about their expenditure on subsidies. If they spend a huge portion of their revenue on freebies, there will be less to spend on the welfare of the state. The need for announcing freebies arises when leaders start their election campaigns without any credible manifesto, so in order to attract the voters they promise freebies. When we look at freebies from an economic lens, the concept of freebies is against the basics of economic principles, as they state that everything has a price and nothing can be free because someone has to pay for the free item. In this case, the Indian Government is paying from its revenue. Such a type of expenditure increases the fiscal deficit. Last year, the Indian Government’s Fiscal Deficit was 6.71% of the Gross Domestic Product. And according to the Fiscal Responsibility and Budget Management Act, 2003 (FRBM) , it should be decreased to 3% of the total GDP.

Former Chief Minister of Delhi, Mr. Arvind Kejriwal, was criticized by the opposition for using a certain amount of the budgetary surplus to give out freebies in the form of free and subsidized electricity, water and free bus and metro tickets for women. The leaders from opposite parties also raised questions against AAP’s election manifesto for the Punjab elections, as it included 300 units of free power every month. In Delhi, per month an average of 47 lakh consumers get the benefit of the electric subsidy in which 30 lakh consumers do not have to pay for anything and 17 lakh get a 50% subsidy which is capped at Rs 800.

The state's power subsidy bill is around ₹ 3,200 crores per month. When AAP came into power in Punjab, in order to keep the promises, the AAP government came up with the electric subsidy policy. It raised costs to the state exchequer by over 16 percent of total revenues. In the case of Delhi, as it is a Union Territory, the Central Government pays for the state’s police force, defence etc. But in case of Punjab, the state government is responsible for all the public expenses. This makes it hard for the state government to pay for subsidies like the Delhi government. The subsidy of free 300 units of electricity to every household per month was announced despite unpaid subsidy bills over ₹9000 crores to the distribution entities, along with that state government department had arrears of around Rs. 2600 crores.

As Punjab was grappling with mounting dues and subsidies, the capex loans allotted to the Punjab government by the central government in the FY 2026-27 is  ₹6799 crores . Now, Punjab is one of the top 5 financially vulnerable states in our country due to high debt levels, the quantity of expenditure and the amount of fiscal deficit. In a report by CRISIL, prepared against the backdrop of the Sri Lanka debt crisis, it is mentioned that most of the Indian states are in precarious debt situations, which will constrain their ability to spend on more crucial public welfare measures. It also linked the dire condition of state finances to freebies, particularly power subsidies that have ballooned the dues to distribution companies.

Conclusion

India cannot become a strong economy while its currency is losing value every month and making the country poorer.  In order to do so, India needs to shift from being an import led economy to an export led economy, develop captive capacities in gold, oil and gas, scaling up industrial infrastructure and supplanting electoral freebies with genuine investment in people. When the Government provides goods for electoral advantage, it sure benefits the people but, these are not a part of any fixed welfare schemes or budgets due to which it leads to high taxation and low productivity. As a result, citizens become dependent on the government and also disrupts state finances and throws governments into a debt spiral. Freebies give temporary respite to the masses but they put a dent in the country’s economy. If that money is spent on development projects, investments, development of roads, which may generate employment instead of spending on freebies, it will help in the long run for the economy to flourish.  India is considered as the fastest growing major economy in the world, it is not enough if it is not enough to fulfill the country’s requirements.

Author: Falakh Chawla in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney

Endnotes

1. Reserve Bank of India, Handbook of Statistics on the Indian Economy, exchange-rate data on the Indian rupee against the US dollar. The RBI's historical exchange-rate series provides the appropriate primary source for analysing long-term rupee depreciation rather than relying solely on media reports.

2. Petroleum Planning & Analysis Cell (PPAC), Ministry of Petroleum and Natural Gas, Government of India, Import/Export of Crude Oil and Petroleum Products. PPAC data records India's continuing dependence on imported crude oil; for April–September 2025, crude-oil import dependence was reported at 88.4%.

3. Ministry of Finance, Government of India, Union Budget 2026–27, Fiscal Policy and Fiscal Management documents. The Union Government estimated the fiscal deficit at 4.3% of GDP for FY 2026–27, following a revised estimate of 4.4% for FY 2025–26.

4. Ministry of Finance, Government of India, Union Budget 2026–27, External Sector and Macroeconomic Overview. The Budget documents report that India's current-account deficit declined to 0.8% of GDP in H1 FY2025–26 and that total exports reached US$825.3 billion in FY2024–25, providing important context for assessing whether India's external sector can offset foreign-exchange outflows.

5. Reserve Bank of India, Foreign Exchange Reserves and related weekly statistical releases. Foreign-exchange reserves are a key instrument available to the RBI in managing excessive volatility in the rupee. As of the week ending 4 September 2026, India's reserves stood at a record US$785.7 billion, illustrating the scale of the country's external buffer even amid recent rupee pressure.