The depreciation of the Indian rupee during the current financial year 2025-26 has been influenced by the increase in trade deficit and likely prospects arising from the ongoing developments in India’s trade agreement with the US, amid relatively weak support from the capital account, the Parliament was informed on Tuesday.
The Indian rupee broke a historic barrier by crossing 90 against the US dollar this month.
“Various domestic and global factors influence the exchange rate of the Indian rupee, such as the movement of the Dollar Index, trend in capital flows, level of interest rates, movement in crude prices and current account deficit, etc,” Minister of State for Finance Pankaj Chaudhary told the Rajya Sabha in a written reply to a question.
However, he noted that the depreciation of currency is likely to enhance export competitiveness, which, in turn, impacts the economy positively.
“On the other hand, depreciation may raise the prices of imported goods. However, the overall impact of exchange rate depreciation on domestic prices depends on the extent of the pass-through of international commodity prices to the domestic market,” he said.
Furthermore, the imports in the economy also depend on various factors, including the demand and supply of commodities in the international market, the kind of tradeable (essential or luxury items), freight costs, availability of substitute goods, etc. Thus, the impact of the movement of the exchange rate on the import cost and hence on domestic inflation and on the economy in general cannot be isolated.
The value of the rupee is market-determined, with no target or specific level or band, Chaudhary said.
The Reserve Bank of India (RBI) regularly monitors the foreign exchange market and intervenes in situations of excess volatility. Further, the RBI monitors key developments across the globe which may have an impact on the USD-Rupee exchange rate. Among others, it includes monetary policy actions of the major Central Banks, major economic data releases across the globe and their impacts thereof, OPEC+ meeting decisions, tracking, and analysing geopolitical events, daily movements in G-10 and EME currencies, etc.
Also, to attract more foreign direct investments (FDI), the government has implemented an investor-friendly FDI policy, wherein most sectors, except certain strategically important sectors, are open for 100 per cent FDI under the automatic route.
More than 90 per cent of the FDI inflow is received under the automatic route.
“The government is continuously working towards attracting FDI into the country by removing regulatory barriers, streamlining processes, developing infrastructure, bettering logistics and improving the business environment by enhancing the ease of doing business, said the minister.
