In early December 2025, the Indian rupee fell past the important 90 mark against the US dollar for the first time.
It dropped to intraday lows above 90.38 before closing near that level on December 17, as the Reserve Bank of India (RBI) suggests. Although official reports say the rupee is still one of the least volatile emerging-market currencies, it has lost about 6.14% of its value this year. This continues a longer-term decline.
Deep concern pervades Indian politics, the economic policy professional circles, the media, and academia over this currency’s weakening. Indian Prime Minister Narendra Modi, who styles himself a Vishwa Guru (global leader), once lambasted the Indian National Congress-led government under Dr Manmohan Singh for allowing the rupee to falter while he was Gujarat’s chief minister.
Yet under his own watch, the currency has depreciated more steeply than during much of Singh’s tenure. Opposition parties in the Lok Sabha and Rajya Sabha, both houses of the Indian parliament, have seized on the issue. Social media bristles with public criticism of Modi’s economic stewardship.
The International Monetary Fund set the stage for these changes. On November 26, the IMF changed India’s exchange-rate regime from “stable” to a “crawl-like arrangement.” This means the rupee is not allowed to float freely but can move up or down in small, controlled increments, a system sometimes called a “crawling peg.”
The IMF says that giving the rupee more flexibility will help India handle external shocks, avoid building up expensive reserves, and develop its financial markets. While this sounds like a step toward modernization, in India’s complex, import-heavy economy, it is more of a risky experiment with uneven results.
The crawl’s contradiction
The principal theoretical benefit of a weaker rupee is greater export competitiveness. Sectors like textiles and pharmaceuticals could gain from lower dollar prices, which may narrow the trade deficit.
However, this textbook advantage clashes with India’s economic reality. The country has a persistent trade deficit, mainly due to oil imports. India imports over 80% of its oil, making it highly sensitive to global oil prices and exchange rate swings. A systematically weakening rupee raises the local cost of each barrel of imported oil.
This inflationary pressure strikes at the heart of India. Rising fuel prices are driving up transportation costs, which are essential for the vast nation. Logistics expenses may surge up to 30%, feeding into the prices of food and manufactured goods.
An Asian Development Bank study suggests that a 10% rise in food prices could push 30 million Indians below the poverty line. Inflation is worsened by higher import costs of other raw materials. With the RBI’s intervention limited under the new IMF regime, it is constrained in its ability to fight price rises.
Monetary policy is less effective, putting more strain on already limited fiscal policy.
Fiscal straitjacket, social strain
Here lies the second major contradiction. The government’s debt stands at a towering 81.9% of GDP, severely constraining its fiscal space. Fiscal space refers to the government’s ability to spend money or cut taxes without jeopardizing its financial stability.
A weaker rupee increases the rupee burden of servicing foreign currency debt, which constitutes 19.15% of GDP, further straining the exchequer. In this context, the state has little room to increase subsidies on fuels or food to cushion the blow for low-income citizens. Recent GST (Goods and Services Tax) reforms and the imperative for fiscal consolidation—reducing deficits and debt—make such interventions even more difficult.
The socioeconomic consequences are clear. Inflation erodes purchasing power, hurting the poor and middle class, while the wealthy can hedge. Inequality grows. The “crawl-like arrangement,” meant to signal stability and flexibility, risks causing domestic instability if prolonged.
The government’s ability to stabilize prices or increase social spending is limited by debt, worsened by the weaker currency.
Investor confidence a double-edged sword
The IMF’s reclassification is ostensibly meant to boost foreign investor confidence. This is done by promising greater market-driven flexibility and reducing arbitrary intervention. A predictable, gradual crawl—a slow, steady movement of the currency’s value within a controlled range—could, in theory, attract foreign investment into bonds and stocks.
However, confidence is a fickle thing. The rupee’s heightened volatility—it is now more volatile than the Chinese yuan—creates uncertainty that unnerves the very investors it aims to attract. Currency risk is the potential for investors to lose money due to changes in exchange rates. It increases, and the threat of capital outflows during periods of global stress looms larger.
For businesses, both domestic and multinational, this volatility is a planning nightmare. It complicates long-term investment decisions and jeopardizes profit margins. It can also erode brand value.
While a weaker rupee might make Indian assets appear cheaper in dollar terms, the associated macroeconomic instability—rising inflation, a pressured fiscal position, and a growing trade deficit driven by costly oil—can easily outweigh this superficial appeal. As a result, foreign direct investment may hesitate rather than rush in.
Nowhere are the immediate costs clearer than in transportation and logistics. A sector wholly dependent on fuel prices faces 15-20% cost increases across road, rail and air freight. This inflates the price of agricultural produce from farm to market and directly stokes food-price inflation.
It also disrupts industrial supply chains and squeezes micro, small, and medium enterprises (MSMEs) operating on razor-thin margins. The quest for efficiency and a shift to alternative energy, like electric vehicles, is laudable but remains a long-term, costly transition.
The immediate reality is that a crawling rupee acts as a relentless tax on the movement of goods and people across India.
Limits of monetary sovereignty
The new regime limits the RBI’s ability to manipulate the exchange rate. This aims to foster deeper currency markets, where buyers and sellers can trade currency more freely, but it immediately reduces a key lever for macroeconomic stability.
The RBI cannot aggressively defend a particular rupee level to curb imported inflation or calm market panic. Its focus now shifts to managing inflation through interest rates. But this tool is blunted by supply-side shocks from oil and food prices.
Supply-side shocks are sudden changes that disrupt production or increase costs. The central bank is left mopping up a flood with monetary policy while the fiscal tap stays largely closed.
The IMF’s prescription, while intellectually coherent in a generic model, fails to account for the specific vulnerabilities of the Indian economy. These include its extreme dependence on imported energy, its precarious fiscal position, and its vast population living on the economic margin.
Perilous monetary path
While the “crawl-like arrangement” may offer long-term theoretical benefits, such as driving efficiency and accelerating the energy transition, the short- to medium-term path is fraught with peril. It presents entrenched inflation, exacerbated inequality, strained public finances, and investor uncertainty.
For Prime Minister Modi, who previously emphasized currency weakness as a political instrument, current developments present a significant policy challenge. His message of national strength now faces scrutiny as the currency continues its decline and as fiscal and policy constraints become evident.
The rupee’s performance reflects broader trade-offs between international credibility and domestic stability, as well as between long-term reforms and short-term impacts on Indian citizens. India’s economic leadership is tested by its capacity to navigate these complex conditions without adverse consequences for the population and economy.
The global community and Indian citizens alike are attentive to the outcomes and effects on livelihoods.
Bhim Bhurtel is on X at @BhimBhurtel
