Every time the rupee slides past another round number against the dollar, the same debate breaks out. Television panels turn it into a scoreboard of national strength. Social media turns it into a political weapon. Very little of this debate is about economics.
Strip away the noise, and an exchange rate is just a price — the price of one currency in terms of another, set by demand and supply like any other price. Demand for the rupee comes mainly from India’s trade earnings and from foreign capital that wants to own rupee assets. Supply of rupees is shaped by domestic fiscal deficit, money supply growth, and the pace of domestic inflation relative to the rest of the world. A country that runs a trade deficit, expands its money supply to fund government spending, and tolerates a higher inflation rate than its trading partners will see its currency drift lower over time. This is not a defect. It is arithmetic.
What is worth examining more closely is the fiscal piece of that arithmetic — not fiscal deficit as a single number on a budget slide, but as a growing stock of promises that a democratically elected government finds very hard to walk back.
Promises are liabilities too
A subsidy, a free ration scheme, a monthly cash transfer to women or farmers, a pension — once announced, these are rarely withdrawn. Politically, taking away a benefit is far costlier than granting one. Over time, these commitments start to behave less like annual budget line items and more like long-duration liabilities sitting on the government’s balance sheet, denominated entirely in rupees.
This detail — that the liability is in the government’s own currency — matters more than it first appears. Sovereigns that owe money in their own currency almost never default outright. They have a far easier option available: let inflation and currency depreciation quietly reduce the real value of what they owe, while continuing to pay the promised amount in full nominal rupee terms. The pensioner still gets the same number of rupees. The farmer still gets the same cash transfer. But each of those rupees buys a little less than it used to, and each dollar of external obligation gets a little easier to run since the government’s own tax revenue — also denominated in inflating rupees — grows in nominal terms even when real growth is unchanged.
Seen this way, currency depreciation is not simply something that happens to a fiscally stretched government. It is something that works in that government’s favor. A rupee that strengthened sharply would do the opposite — it would raise the real value of every subsidy and every pension commitment already on the books, making an already large fiscal burden heavier rather than lighter. Structurally, the incentives point only one way.
The scale of the promise
It helps to put a number on how large this pool of promises has become. Going by the 16th Finance Commission’s own review of state finances, states’ spending on subsidies has grown from roughly INR 4 lakh crore in FY19 to about INR 10 lakh crore budgeted for FY26 — two and a half times in seven years. Unconditional cash transfers to households have grown even faster, from about INR 73,000 crore to roughly INR 4.2 lakh crore over the same period, nearly a six-fold increase. The Commission’s own conclusion is that this expansion, more than anything else, is what is pushing an increasing number of states into revenue deficit — borrowing not to build a road or a hospital, but simply to fund routine, recurring expenditure.
The states, taken together, are currently budgeting a fiscal deficit close to 3% of their combined GSDP, and the Finance Commission’s own roadmap does not see the center’s fiscal deficit falling below 3.5% of GDP before FY31. Add the two together and general government borrowing in India stays well above 6% of GDP for years to come. That is the pool of rupee liabilities this argument rests on — large, growing, and, going by the political economy of welfare spending in India over the last decade, not something that reverses easily regardless of which party is in office.
What this means for an investor
Treat gradual rupee depreciation as the default, ongoing case for planning, not as an occasional shock to be reacted to. Anyone with long-dated rupee liabilities, or future foreign expenses such as a child’s education abroad, should build this into their planning horizon rather than their reaction to headlines.
Some permanent allocation to real assets or growing assets like equities is a reasonable hedge against this specific dynamic — the slow erosion of the rupee’s purchasing power — distinct from any short-term view on the dollar.
Businesses with real pricing power, export linkages, or import-substituting products benefit structurally from a currency that drifts lower over time. Businesses carrying dollar-denominated debt against rupee revenues carry the opposite exposure and deserve closer scrutiny.
The composition of government spending — how much goes to capital creation versus how much goes to subsidies and transfers — is a slower-moving but more revealing signal of currency direction than the monthly trade deficit or foreign investment flow numbers that dominate financial headlines.
A closing thought
The Bhagavad Gita’s second chapter tells Arjuna that heat and cold, pleasure and pain, come and go like the seasons, and that a steady mind learns to bear them rather than resist them. A currency behaves in much the same way over a long enough horizon. Its slow drift lower is not a nation failing to be mourned or denied. It is simply the mechanism doing what it was always going to do — quietly, and on schedule.
(This post draws heavily from Vikas Sehgal’s post My Mother’s Pressure Cooker . All copyrights are acknowledged with gratitude.)
Also read
Rupee Depreciation: Demand, Supply, and Simple Economics
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