Aniket PujariThe recent weakness of the rupee, which has dropped nearly 4.7% in 2025 so far, has significantly underperformed compared to other currencies, has led to a substantial real effective exchange rate depreciation exceeding 9%.
According to a report by BofA Securities, this weakness in the Indian currency is likely to persist in the near term given the latent uncertainty of the US India trade deal, and pressure on capital flows, can and will impact various macroeconomic variables in India, if it persists.
On Tuesday, the rupee firmed slightly to 89.9775 at 10:45 a.m. IST, a touch stronger from its close of 90.07 in the previous session.
Here are five channels of weak rupee impact on Indian economy –
The brokerage firm said that the weakness in rupee can be a negative in the near term, but a positive in the longer term, as it tends to influence both consumer and producer behavior, through changes in both output and price setting behavior.
Sentiment
Historically, sentiment indicators such as PMI, consumer confidence, business sentiment, and policy uncertainty measures tend to respond to significant changes in exchange rates.
“As per our analysis, we find that during periods of more than 10% weakness in the rupee, the catalyst for sentiment weakening could be seen in the data, and given the extent of current weakness, it can feed through consumer sentiment and business sentiment potentially.
GDP Growth
According to the report, the main impact of a weaker exchange rate occurs through exports and imports, as these are the key components most sensitive to exchange rate fluctuations.
Inflation
Historically, the relationship between the exchange rate and inflation has been strong in India, where a weaker rupee often results from high inflation, which then can further fuel inflation. However, this cycle is not evident in the current situation, and the usual impact of increased imported inflation seems to be relatively mild, unlikely to trigger a significant inflationary spiral, the report said.
External Balances
The firm further explained that the the impact on growth effects on external finances will mostly follow the expected pattern through the current account rather than the capital account. Within the current account, all key components are usually affected, though the timing and extent of these effects vary.
Fiscal Balances
The fiscal impact of a weaker exchange rate is uncertain at this point, particularly because the government no longer provides significant fuel subsidies, except for LPG products. Although LPG subsidies might increase to some extent, the firm expects that the main effect on government spending to come from fertilizer subsidies, which are likely to rise due to the weaker currency.
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