Explained |Why Indian rupee is falling when economy is growing?

A week ago, Indians were over the moon after the economy recorded a six-quarter high growth of 8.2 per cent in July-September— a number which exceeded the expectations of most economists. However, this euphoria soon gave way to confusion when the Indian Rupee dropped to an all-time low against the US dollar-breaching the Rs 90 mark.

These diametrically opposite economic observations are propelling the common man to question the veracity of the GDP growth as well as the puzzling depreciating value of rupee.

However, economists have stated that the drivers of GDP are widely different from the forces that drive the value of the rupee.

Side effects of US tariffs, trade deal

The tariffs imposed by the United States are the driving force behind the depreciating value in Indian rupee

RBI Governor Sanjay Malhotra on Friday dismissed concerns of the falling rupee value stating this was just a side effect of tariffs imposed by the Trump administration. He believes when India and US will finalise their trade deal, the pressure will automatically be relived on the "current account".

High demand for US dollars

Rising geopolitical tensions and a high US Federal Reserve rate have prompted foreign portfolio investors to move their money back into US dollar.

NSDL data shows that foreign investors have pulled out Rs 13,121 crore (USD 1.46 billion) from Indian equities in the first four days of December, taking the total outflow for 2025 to Rs 1.56 lakh crore (USD 17.8 billion).

Due to dollar's safe-haven reputation, investors have been selling rupees to buy more dollars. This in turn increases the demand for the dollar, thereby strengthening it against other currencies.

India's imports: Wearing rupee down?

A fast-growing economy like India requires electronics, machinery and energy for day-to-day functioning. India imports a significant amount of these materials. However, as a result, it is vulnerable to fluctuations in global prices.

When the price for any of these essential imports rises, India has to pay more dollars to purchase the same quantity.

This too increases the demand for the dollar and puts pressure on rupee.

Moreover, India's trade deficit is widening as India's exports too have declined. Data shows India's merchandise exports fell 11.8 per cent year-on-year.

Is RBI aiding to stop the depreciating tide?

Reserve Bank Governor Sanjay Malhotra clearly stated that the the central bank does not target any band for the rupee in the forex market, and allows the domestic currency to find its own correct level.

Malhotra explained, "The country has sufficient foreign exchange reserves and the current account is manageable, and given the strong fundamentals of the economy, the country should witness good capital flows going forward."

On Friday, The Reserve Bank of India (RBI) lowered key policy interest rates by 25 basis points.