Rupee at 95

A reason to worry?

One reader recently wrote asking about the rupee’s slide against the dollar. With the USDINR hovering around ₹95, I’m sure many would have this question – Why is the Rupee really depreciating? Is there anything wrong with our economy?

Before getting into what’s actually happening, one number is worth keeping in mind. When India moved to a market-determined exchange rate in 1992-93 after the liberalisation reforms, the rupee was at roughly ₹26 to the dollar. It’s now at ₹94. That’s a depreciation of about 3.7% every single year, on average, for over three decades. And for most of that time, the economy grew steadily.

So the rupee falling is not new. What’s worth understanding is why it happens, what it actually costs us, and whether ₹95 today is cause for concern or simply where things were always headed.

Why Has the Rupee Always Fallen?

Why It Still Hurts, The Import Problem

We import roughly 85% of our crude oil needs. Last year, India’s oil import bill was about $137 billion. Every time the crude prices spike (like how they have during this war), our import bill rises. On top of that, India is one of the world’s largest importers of Gold and a significant importer of edible oils like palm oil from Malaysia and Indonesia.

Against that, our exports of goods don’t match up. This is what economists call the Trade Deficit, we spend more dollars buying from the world than we earn selling to it.

Here’s where our Services exports and Remittances come to rescue.

Our Current Account Deficit (Trade Deficit minus Services and Remittances) has shrunk dramatically over the last decade. India’s IT sector, BPO companies, and services exports bring in enormous amounts of foreign currency, quietly acting as a cushion against everything we spend on oil and gold.

Our Current Account Deficit is still negative, but with a growing economy and a strong thrust on increasing exports, the pain is reducing.

The Other Pressure: Foreign Investors Leaving

When US interest rates go up or when Indian equities start becoming less attractive due to high valuations or there are more lucrative opportunities elsewhere, investor money flows out of India. Simple as that.

This is the problem that we have faced in the last couple of years.

In 2024 FIIs pulled out Rs. ~3 Lakh Cr and the 2025 number was again ~3 Lakh Cr. In 2026, the number is already ~1.6 Lakh Cr.

This gets reflected in our Capital Account Flows (see chart below) which has been the lowest in the last 15 years.

When investors pull out from India, the demand for USD shoots up. And all that dollar demand puts pressure on the rupee. The RBI does step in sometime to defend the rupee by selling dollars from its reserves to slow the fall. With $698 billion in forex reserves in March 2026, we have a solid buffer. But every dollar spent defending the rupee is one less dollar available for everything else.

The Full Picture – Balance of Payment

Is the Rupee Cheap or Expensive Right Now?

This is where it gets genuinely interesting. Currencies, like stocks, have a fair value. Economists track this using something called REER, the Real Effective Exchange Rate. Think of it as a fair value meter that measures the Rupee against all our major trading partners, adjusted for inflation.

Think of it as a fair value meter for a currency.

Above 100 means the Rupee is overvalued, hurting exports. Below 100 means undervalued, helps exporters.

Source: BIS, FRED

The Rupee was arguably expensive on a real basis for large parts of 2024. As the Rupee depreciated from 83 in the start of 2024 to ~95 now, the REER has come down to around 94.8. This means the Rupee has moved from overvalued to slightly undervalued in real effective terms.

Summing it up

Rupee at ₹95 is not the emergency it looks like on TV. The Middle east war has complicated things in the short term – higher oil prices mean a larger import bill, which puts direct pressure on the currency. But that’s a cyclical problem, not a structural one.

Structurally, the rupee was always going to get here. That’s what inflation differentials do over decades. And as India grows into a more developed economy, our inflation will gradually converge with the US, slowing the pace of depreciation over time.

The good thing is that our current account position, accounting for the size of the economy, is in far better shape than it was ten years ago. And on a fair value basis, the Rupee has become cheaper.

The noise around the Rupee is always louder than the actual signal. The signal right now says: things are difficult but not broken, and in some pockets, there’s genuine opportunity.