Since prime minister Narendra Modi came to power in 2014 the Indian fiat paper currency rupee has depreciated by 55% against the US dollar. During the Manmohan Singh era that depreciation was 33%. But, not just with the US dollar, it has depreciated significantly against UK pound (25%), Euro (30%), Swiss Franc (60%), and Singaporean dollar (40%), too. Table 1 below shows this depreciation.
| Currency | 2014 | 2016 | 2018 | 2020 | 2022 | 2024 | 2026 (current) |
| USD | ₹60–63 | ₹66–68 | ₹68–74 | ₹74–76 | ₹76–82 | ₹82–84 | ₹92–93 |
| GBP | ₹100–105 | ₹88–95 | ₹90–100 | ₹95–100 | ₹90–100 | ₹100–106 | ₹120–125 |
| EUR | ₹80–85 | ₹72–78 | ₹78–85 | ₹82–88 | ₹80–88 | ₹88–92 | ₹105–110 |
| CHF | ₹65–70 | ₹68–75 | ₹70–78 | ₹78–85 | ₹82–90 | ₹90–95 | ₹110–115 |
| SGD | ₹48–50 | ₹47–50 | ₹50–54 | ₹52–56 | ₹55–60 | ₹60–63 | ₹68–7 |
Before coming to power, Narendra Modi didn’t get tired of criticizing his predecessor Dr. Manmohan Singh’s government for rupee depreciation. Below are some selected statements of Modi about rupee depreciation,
“Today our currency is on deathbed… in terminal stage and urgently needs attention.” And “At present both — rupee and UPA government — have lost their value.” (The Economic Times, 2013 speech)
“There is a competition between Congress and the rupee… who will fall lower.” (Telegraph India, 2013 tweet)
“Look at how fast rupee is falling… there is a competition between rupee and the government in Delhi.” (The Federal, 2013, Campaign speech)
Now, during his 12-year rule when rupee has lost 55% of its value, he has nothing to say about it and his finance minister is shamelessly claiming that rupee is just fine!
“Compared with other emerging economies, the rupee is doing fine…absolutely doing fine.” (Economic Times).
Why is the rupee falling against the dollar and other major currencies?
Just like any other commodity trading in the market, rupee is also a commodity (albeit a special one, but a commodity nonetheless). Just like other commodities, its price, reflected in its purchasing power, is determined by the forces of demand and supply. When it comes to rupee’s exchange rate with dollar four factors are important:
- Supply of rupees
- Demand for rupees
- Supply of dollars
- Demand for dollars
Ceteris paribus, when supply of rupees rises, it weakens against US dollar, and vice versa. And when demand for rupees falls, it again weakens against US dollar, and vice versa. Below I am going to present a model which accounts for these four factors, and tell us why rupee is weakening against dollar rapidly.
Supply and Demand Model
As we have seen above, supply and demand for rupee are two key factors determining rupee purchasing power and its relative weakness (or strength) against US dollar. Indian central bank RBI controls the supply of rupees. They have the monopoly over issuance of rupee notes (physical and digital). On the demand side, the following are a few critical factors that determines demand for rupees vis-a-vis dollar:
- Rupees money supply (M3)
- US interest rates that indirectly influences rupee demand. When US interest rates rise, demand for rupee falls as investors rush to buy dollars compared to rupees.
- FDI Outflows that lowers demand for rupees (Capital leaving India where investors pull money out of India)
- Oil prices. India buys almost all of its oil from outside, for which it has to pay in US dollars. Higher oil prices result in lower demand for rupees compared to US dollar.
Below is our regression model, based on data from 2014 to present, to estimate relative impact of these critical factors of dollar rupee exchange rate.
USD/INR = α + β1⋅ M 3 + β2⋅ iUS + β3⋅ CapitalOut f low + β4⋅ Oil + ε
Where,
1. M3 = India money supply (₹ trillion),
2. i_US = US Fed funds interest rate (%),
3. CapitalOutflow = Net portfolio + other capital leaving India (USD billion); and
4. Oil = Brent crude price (USD/barrel)
Below is the estimated regression equation:
USD/INR = 35.0 + 0.08 M 3 + 1.9 iUS + 0.065 CapitalOut f low + 0.12 Oil.
Coefficient Interpretation
| Variable | Coefficient | Meaning |
| M3 | 0.08 | ₹1T increase → INR weakens ~0.08 |
| US rates | 1.9 | +1% Fed rate → INR weakens ~1.9 ₹ |
| Capital outflow | 0.065 | +$10B outflow → INR weakens ~0.65 ₹ |
| Oil price | 0.12 | +$10 oil → INR weakens ~1.2 ₹ |
| Intercept | 35.0 | Baseline INR (trend) |
Discussion
As the results of regression analysis above shows, M3 rupee supply drives the long term depreciation trend of rupee, while US interest rates, capital outflows (FDI moving out of India), and oil prices add short term volatility.
After coming to power in 2014, Modi government has printed a lot of rupees for its profligate spending and vote buying purposes. The situation is so bad that government expenditure is pretty much the sole driver of economic growth right now! He has killed private economy using his mindless policies like demonetization, GST, nationwide Covid lock downs, and a myriad of complicated high tax rates and crippling regulations. This annual steady increase in rupee printing has weakened rupee.
Modi’s failed economic and foreign policies (his ill fated fake friendship with US president Donald Trump, his siding with Israel during ongoing US/Israel vs. Iran war which is sending oil prices soaring, his inability to face pressure from Trump during trade war discussion due to his name in Epstein file scandal etc.) are also responsible for demand side shocks to rupee. The reason why capital is flowing out is because Modi government has failed to keep investors in India. During the UPA/Manmohan Singh government, India experienced moderate FPI inflows and occasional outflows. Net outflows were smaller relative to GDP and capital markets size. Most years saw positive net inflows, except during global shocks like the 2008–09 financial crisis. Outflows were mostly event-driven (2008 crisis, 2013 taper tantrum). Cumulative outflows were limited and rupee depreciation averaged ~33% over the full period. During the Modi government, FPI outflows became larger and more frequent, despite strong FDI inflows. Several years saw net FPI outflows exceeding ₹1–1.5 trillion annually, particularly 2022–2026. Outflows were more systematic and larger in magnitude, not just crisis-driven. Cumulative outflows contributed to rupee depreciation of 55% during this period.
This shows how the UPA era government of Dr. Manmohan Singh was able to manage economy much more wisely even when facing global crisis like the sub-prime financial crisis of 2007. Modi government has failed in wisely managing both local and global affairs. Most of Modi government era problems are created by Modi himself, like demonetization or implementing severe nationwide lockdowns, or failing to manage critical oil imports, etc.
The reason why India is facing an oil and gas crisis is because Modi wants the friendship of Israel more than Iran. Interestingly, during Manmohan Singh government the average price of oil was much higher ($82) than Modi era ($66.6), but because of UPA government’s better management of the economy rupee didn’t weaken a lot like during Modi era. It shows a clear strategic vision failure of Modi government. The reason why trade deficit is rising is because Modi government cannot stand up to the pressure of US government, and Modi’s erratic economic policies have destroyed production capacities of Indian businesses.
All in all, Modi’s total mismanagement of both economic and foreign policies have reduced the rupee to Asia’s worst performing currency.
Data Source
Reserve Bank of India. (n.d.). Database on Indian economy (DBIE). https://dbie.rbi.org.in
Reserve Bank of India. (2024). Handbook of statistics on the Indian economy. https://www.rbi.org.in
Reserve Bank of India. (n.d.). Reference rate (USD/INR). https://www.rbi.org.in
Federal Reserve Bank of St. Louis. (n.d.). Indian rupees to one U.S. dollar (DEXINUS). Federal Reserve Economic Data
XE. (n.d.). Historical currency exchange rates. https://www.xe.com
Board of Governors of the Federal Reserve System. (n.d.). Federal funds effective rate. https://www.federalreserve.gov
Federal Reserve Bank of St. Louis. (n.d.). Federal funds rate (FEDFUNDS). Federal Reserve Economic Data
Reserve Bank of India. (n.d.). Balance of payments statistics. https://www.rbi.org.in
World Bank. (n.d.). World development indicators. https://data.worldbank.org
International Monetary Fund. (n.d.). Balance of payments statistics (BOPS). https://www.imf.org
U.S. Energy Information Administration. (n.d.). Petroleum and other liquids: Brent crude oil prices. https://www.eia.gov
World Bank. (n.d.). Commodity markets outlook (Pink Sheet). https://www.worldbank.org
Bank for International Settlements. (n.d.). Statistics and datasets. https://www.bis.org
Trading Economics. (n.d.). Economic indicators and historical data. https://tradingeconomics.com
