Do it yourself

The INR has been under steady depreciation pressure for the past few months. USDINR is down about 4.4% year-to-date, raising familiar concerns about stability and comparisons to the 2013 balance-of-payments scare.

It’s worth noting that the recent 50% US tariffs—which grabbed headlines—are not the main reason behind the rupee’s weakness. India’s exports have broadly held up in the first ten months of the financial year. The pressure has come instead from three other factors:

·         Higher imports, largely driven by a jump in gold imports

·         Weak FDI inflows

·         Persistent FPI outflows

Together, these have widened the current account deficit and strained the balance of payments, naturally weighing on the currency.

Where sentiment meets misunderstanding

In the public narrative, the exchange rate of the INR often gets linked—incorrectly—to national pride. Politicians, spiritual leaders, activists and commentators have repeatedly projected a weaker rupee as a national humiliation. Much of this is rhetoric; some of it stems from a basic misunderstanding of economics. At its core, a currency’s exchange rate is simply a function of demand and supply. Nothing more. Nothing personal.

How demand and supply actually work

In today’s world of fiat money, demand for a currency mainly depends on:

·         Its international acceptance as a store of value or medium of exchange

·         The country’s trade balance

Supply, on the other hand, is shaped by domestic conditions:

·         Fiscal deficit

·         Monetary policy and money supply

·         Growth trajectory

This is why closed economies—North Korea, Afghanistan, Tajikistan—can theoretically have “stronger” currencies. With very limited external trade, demand for foreign currency is low. But this strength is optical and meaningless in real economic terms.

India, in contrast, is a large, open, fast-growing economy that:

·         Runs a significant trade deficit

·         Expands domestic liquidity to fund fiscal needs

·         Maintains a higher inflation trajectory to support growth

·         Offers higher interest rates than developed markets

·         Actively integrates with the global economy

Besides, India’s inflation has been structurally 3–4 percentage points higher than the US. Under Purchasing Power Parity (PPP), this guarantees long-term USDINR depreciation.

All of this naturally creates higher demand for foreign currencies, especially the USD and EUR. A gradual INR depreciation in this context is normal and predictable.

What can strengthen the rupee?

There are only two durable ways to improve the demand–supply balance in India’s favor:

·         Raise domestic rates meaningfully to attract global capital into INR debt despite the risks; or

·         Make Indian assets irresistibly attractive—equity, real estate, infrastructure assets—so that global investors bring in long-term capital. To do this, the following would be needed:

·         Productivity gains (higher real growth without higher inflation)

·         Export competitiveness (moving up the value chain)

·         Lower fiscal deficit (reduces money supply expansion)

·         Deep, credible financial markets (especially long-tenor debt)

·         Institutional credibility (policy stability, governance)

Unless one of these plays out at scale, the rupee will continue its gradual depreciation trend. That’s not a sign of national weakness; it’s textbook economics.

A quick reality check

The Bhutanese Ngultrum is pegged to the INR (1 BTN = 1 INR). So USDBTN depreciates in sync with USDINR. Bhutan’s national pride remains intact.

The Afghan Afghani trades “stronger” than the rupee (1 AFN ≈ 1.34 INR). This obviously does not make Afghanistan economically more prestigious than India.

Currencies reflect macro conditions—not national greatness.