India’s Rupee Struggles Amid Global Market Volatility and Domestic Challenges

In a recent social media post, an ardent supporter of India’s ruling party praised the rupee’s apparent strength compared to the Turkish lira, which has devalued by 92% against the Indian currency over the past 11 years. His message implied Turkey’s economic instability versus India’s resilience. Ironically, this comparison comes as the rupee itself hits record lows, hovering around 84 to the US dollar, with the Reserve Bank of India (RBI) likely intervening to keep it from slipping further.

The rupee’s current challenges stem from various factors. Geopolitical instability in the Middle East has fueled volatility in oil prices, which, combined with high gold prices and an increased risk-averse attitude among investors, exerts further pressure on the currency. Recent weeks have seen consistent dollar sales from Indian state-run banks, driven by dollar purchases from both foreign banks and local oil firms. Meanwhile, foreign investors pulled over ₹20,000 crore from Indian equities in the past week alone and close to $10 billion this month, marking a level of selling pressure exceeding that seen during the COVID-19 pandemic and even the 2008 financial crisis. This intensified exit partly stems from a shift in investor focus to China’s economic stimulus measures and the recent wave of primary market offerings in India. Political uncertainties in the United States have also played a role.

The sell-off was further catalyzed by the Union Budget announcement this year. Shortly after the Finance Minister unveiled changes to capital gains tax in July, foreign institutional investors began reducing their positions. While some criticize these investors for causing instability, it’s crucial to remember their substantial contribution to India’s stock market in recent years. Yet, this foreign capital influx has done little to arrest the rupee’s depreciation over time.

Internationally, the Federal Reserve’s actions continue to loom large, with widespread speculation about its future policies. The U.S. economy’s strength has fueled a rally in the dollar, causing U.S. yields to rise, which, in turn, negatively impacts capital flows into emerging markets, including India.

Despite these significant pressures, some have mounted a spirited defense of the rupee’s decline, asserting that all emerging market currencies have been depreciating and that the rupee’s fall is primarily due to temporary capital outflows. But when examined more closely, such defenses often raise further questions.

For instance, it’s puzzling why India, which has prided itself on a high-growth trajectory, faces a currency slump comparable to other nations. A decade ago, Prime Minister Narendra Modi spoke passionately about reversing the rupee’s weakness, warning in 2013 that the currency’s slide endangered India’s economic stability. At that time, the rupee hovered around 62 to the dollar, whereas it now trades below 84—a decline of over 25% in 10 years.

Another argument suggests it’s misleading to focus only on the rupee-dollar exchange rate. Yet, as critical sectors like oil and gas, power, and telecom depend heavily on imports, any weakening of the rupee against the dollar amplifies import costs. With nearly 90% of India’s imports invoiced in dollars, alongside exports, this dependence underscores the dollar’s influence over the rupee’s performance. Even though China represents a substantial share of India’s imports, prices are still primarily invoiced in dollars, keeping the rupee’s fortunes closely tied to the dollar rather than the yuan.

Attempts to diversify currency exposure have seen limited success. For example, the government’s efforts to expand rupee-rouble trade with Russia were hampered by sanctions on Russia, making policymakers cautious. Even Russia’s largest bank, Sberbank AG, was reportedly denied permission by the RBI to export 100 tonnes of Russian gold bars for sale in India due to “supervisory concerns.” Thus, for now, the rupee’s fate remains closely intertwined with the dollar.

This focus on the rupee’s trajectory brings us back to Modi’s early speeches, where he linked the rupee’s fall to corruption. In 2016, the government launched a drastic anti-corruption move through demonetization, causing a sharp drop in currency circulation. However, by 2024, currency in circulation has surged to over ₹34 trillion, more than twice the amount in the immediate aftermath of demonetization. This raises questions about whether currency strength can genuinely serve as a reliable indicator of governance.

Today, two major headwinds loom over the rupee. First, the currency’s ties to the Turkish lira may be more relevant than initially thought. According to the Democracy Report 2024 from the Varieties of Democracy (V-Dem) Institute, autocratization—a trend where countries shift towards authoritarianism—is ongoing in 42 nations, affecting 2.8 billion people or about 35% of the global population. With 18% of the world’s population, India accounts for nearly half of those living in autocratizing nations, according to the report.

The report points to India, alongside countries like Turkey, Mexico, Russia, and the Philippines, as examples of nations experiencing diminishing democratic freedoms. It details how India has seen a steady erosion in freedom of expression, independent media, civil society engagement, and religious freedoms. This shift towards autocracy, the report suggests, could be detrimental to a country’s “economic calling card”—its currency. With more than a decade of control over economic policy, the government can no longer attribute the rupee’s struggles to opposition forces.

Second, beyond political issues, India’s economic growth story also faces challenges. Indicators of urban consumption, from car sales to fast-moving consumer goods, suggest softening demand. Slowing airline passenger traffic and weaker-than-expected festive sales further reflect this trend. As consumer demand falters and salary growth stagnates, inflation remains a persistent issue, particularly in the realm of food prices. Without a robust growth trajectory, it becomes difficult to justify the rupee’s relative strength on the global stage.

Supporters of the rupee’s value often attempt to mitigate concerns by comparing it to currencies that have performed worse. In this view, pointing to the Turkish lira, the Iranian rial, or the Sierra Leonean leone serves as a reminder that India’s currency is not the weakest. Yet, this may not be enough to inspire confidence. For the rupee, a more realistic comparison might now involve looking to currencies lower in the hierarchy rather than seeking parity with stronger economies.

In this light, the rupee’s depreciation tells a broader story, reflecting not just the pressures of global market dynamics but also the unique set of political and economic challenges India currently faces. The question of currency strength is not merely academic; it touches on India’s standing on the global stage, its trade prospects, and its ability to remain resilient amid geopolitical uncertainties.