Rupee under pressure: Trade tensions and economic impact

The Indian rupee has weakened in 2025 due to US tariff policies, foreign outflows, and market uncertainty, depreciating over 2% against the dollar. While exporters struggle with rising input costs, importers face higher expenses for essential goods.

The depreciation has also made foreign education and travel costlier, though NRIs benefit from higher remittance value. With global uncertainties persisting, the rupee’s outlook remains uncertain despite potential RBI interventions.

The Indian rupee has come under pressure in 2025, largely driven by market uncertainty following US President Donald Trump’s tariff policies. The new trade restrictions have disrupted global supply chains, triggered foreign outflows, and increased risk aversion in financial markets. As a result, the rupee has depreciated over 2% against the US dollar year-to-date (YTD).

On February 5, the rupee dropped 36 paise to close at a record low of 87.43 per dollar, following heightened trade tensions between the US and China. The currency opened weak at 87.13 and touched an intraday low of 87.49 before settling at its lowest level. Market analysts pointed to the broad strength of the US dollar, expectations of an interest rate cut by the Reserve Bank of India (RBI), and a lack of aggressive intervention by the central bank as additional factors behind the rupee’s continued slide.

Despite intermittent dollar sales by state-run banks to curb the decline, the rupee’s one-month implied volatility has averaged 3.5% in 2025—significantly higher than last year’s 2%. Moody’s Ratings reported that the rupee has depreciated by 5% over the past two years and over 20% since January 2020, making it one of the weakest-performing currencies in South and Southeast Asia.

The depreciation of the rupee has had wide-ranging effects on trade, travel, education, and inflation, affecting both businesses and consumers.

Exporters: Limited Gains Due to Rising Costs

While a weaker rupee generally enhances export competitiveness by making Indian goods cheaper in global markets, the benefits have been minimal due to the high reliance on imported raw materials. The increased cost of these imports offsets much of the potential advantage. Most exporters hedge their currency exposure through forward contracts, which means they face rising input costs while their earnings remain fixed, putting them at a disadvantage.

Furthermore, shipping, insurance, and marketing expenses—also denominated in dollars—have increased, further neutralizing any competitive edge. In key sectors like pharmaceuticals, gems, and jewellery, where imports make up a significant share of production, the depreciation of the rupee has added to cost pressures rather than boosting exports.

Importers: Higher costs for essential goods

The rupee’s depreciation has made imports more expensive, directly affecting sectors reliant on foreign goods. Importers must spend more rupees for the same quantity of goods, increasing costs for crude oil, fertilizers, electronics, and machinery.

India depends on foreign sources for 85% of its fuel needs, including petrol, diesel, and jet fuel. Other major imports such as coal, plastics, chemicals, vegetable oil, gold, and precious stones have also become costlier. The rising prices of these goods are expected to contribute to inflationary pressures.

Foreign education and travel: More expensive for  Indians

The rupee’s decline has made overseas education significantly more expensive. With tuition fees and living expenses denominated in dollars, Indian students studying abroad now need to spend more rupees to cover the same costs.

Similarly, international travel has become costlier due to both the weaker rupee and rising hotel tariffs. The price increase for overseas vacations has been between 15% and 20% for the April-June period compared to last year. European destinations have seen the steepest hikes, followed by Southeast Asian countries.

“The current 15%-20% rise is the steepest since 2017-18 and 2018-19, where both years witnessed similar jumps in the cost of international tour packages due to rupee depreciation,” said Rajiv Mehra, President of the Indian Association of Tour Operators (IATO). Despite these rising costs, travel demand remains strong, with more Indians booking trips to exotic destinations.

While the rupee’s depreciation poses challenges for businesses and consumers, it offers a silver lining for non-resident Indians (NRIs) sending money back home. A weaker rupee means that remittances fetch higher amounts in rupee terms, providing relief to families dependent on these funds.

Looking Ahead

With the rupee facing continued downward pressure, businesses and consumers are likely to experience higher costs in the coming months. While the government and RBI may consider measures to stabilize the currency, global factors—including US trade policies and market volatility—will play a significant role in determining its future trajectory. Until then, importers, exporters, and travelers will have to adapt to the challenges posed by a weaker rupee, while NRIs sending remittances might be among the few beneficiaries.