Score:
8/15
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Topper’s Copy
GS3
Economy
15 marks
“The recent depreciation of the Indian Rupee amid global geopolitical tensions highlights structural vulnerabilities in India’s external sector.”
Discuss the causes behind the rupee depreciation and critically examine its impact on the Indian economy. Suggest policy measures to ensure exchange rate stability.
Student’s Answer
Evaluation by SuperKalam
Demand of the Question
- Causes behind rupee depreciation - both structural and immediate factors
- Critical examination of impact on Indian economy (positive and negative effects)
- Policy measures for exchange rate stability
- Link to global geopolitical tensions and structural vulnerabilities
What you wrote:
Rupee depreciation refers to a fall in value of Indian rupee relative to major foreign currencies. Indian rupee has been under pressure against US dollar in recent years dropping to around ₹93. INR became the worst performing Asian currency in 2025. Its causes are rooted in both internal and external factors.
Rupee depreciation refers to a fall in value of Indian rupee relative to major foreign currencies. Indian rupee has been under pressure against US dollar in recent years dropping to around ₹93. INR became the worst performing Asian currency in 2025. Its causes are rooted in both internal and external factors.
Suggestions to improve:
- Could strengthen by explicitly mentioning **structural vulnerabilities** as highlighted in the question (e.g., India's high import dependence on crude oil at 85% and persistent current account deficit averaging 1-2% of GDP)
What you wrote:
CAUSES
Economic factors
→ Current Account Deficit - As of 2025 India's imports exceeds its exports by around USD 97 which leads to increased demand of US-dollar.
→ Capital Outflows - over last few years there is a sustained capital outflow with FPIs pulling over ₹253000 crore alone in early 2026.
→ Fiscal deficit - leads to increasing foreign borrowings, weakens confidence in Indian economy.
Global factors
→ Strengthening US dollar
→ Geopolitical tensions - Trade wars, armed conflicts etc
→ Crude Oil Prices - Crude oil forms 20-21% of India's total import value. With tensions in middle east, the prices are soaring high.
CAUSES
Economic factors
→ Current Account Deficit - As of 2025 India's imports exceeds its exports by around USD 97 which leads to increased demand of US-dollar.
→ Capital Outflows - over last few years there is a sustained capital outflow with FPIs pulling over ₹253000 crore alone in early 2026.
→ Fiscal deficit - leads to increasing foreign borrowings, weakens confidence in Indian economy.
Global factors
→ Strengthening US dollar
→ Geopolitical tensions - Trade wars, armed conflicts etc
→ Crude Oil Prices - Crude oil forms 20-21% of India's total import value. With tensions in middle east, the prices are soaring high.
Suggestions to improve:
- Could explore **structural export challenges** (e.g., India's exports concentrated in services while merchandise trade deficit persists at $200+ billion annually)
- Could examine **geopolitical impact mechanisms** (e.g., risk-off sentiment during Russia-Ukraine conflict leading to emerging market currency selloffs, including INR depreciation of 8-10% in 2022)
What you wrote:
Impacts
POSITIVE
→ Boost to Exports
→ Push to domestic productions as imports become costlier.
NEGATIVE
→ Imported Inflation due to essential imports
→ Widens trade deficit as costlier import bill
→ Capital flight due to weakened investor confidence
Impacts
POSITIVE
→ Boost to Exports
→ Push to domestic productions as imports become costlier.
NEGATIVE
→ Imported Inflation due to essential imports
→ Widens trade deficit as costlier import bill
→ Capital flight due to weakened investor confidence
Suggestions to improve:
- Could critically analyze **sectoral impacts** (e.g., IT services benefit from rupee depreciation with 70% revenue from exports, while manufacturing faces input cost pressures)
- Could examine **macroeconomic stability risks** (e.g., corporate debt with foreign currency exposure worth $130+ billion facing repayment pressures)
- Could discuss **monetary policy constraints** (e.g., RBI's dilemma between supporting growth and controlling imported inflation)
What you wrote:
Policy measures:-
① Strengthening External Sector → currency swap agreements, export competitiveness and strong forex reserves.
② Global INR market - develop rupee as a global currency. This can be done by regional agreements to trade in INR rather than USD.
- Promote Masala Bonds
③ Structural trade measures like Make in India.
④ Monetary policy reforms - increase interest rates to attract foreign investors.
Policy measures:-
① Strengthening External Sector → currency swap agreements, export competitiveness and strong forex reserves.
② Global INR market - develop rupee as a global currency. This can be done by regional agreements to trade in INR rather than USD.
- Promote Masala Bonds
③ Structural trade measures like Make in India.
④ Monetary policy reforms - increase interest rates to attract foreign investors.
Suggestions to improve:
- Could detail **immediate measures** (e.g., RBI's forex intervention strategies, swap arrangements with major trading partners like UAE's $75 billion facility)
- Could elaborate **structural reforms** (e.g., Production Linked Incentive schemes to boost manufacturing exports, National Infrastructure Pipeline to reduce import dependence)
- Could suggest **financial market deepening** (e.g., developing corporate bond markets to reduce FPI dependence, encouraging long-term FDI through sector-specific policies)
What you wrote:
Strengthening rupee requires a combination of calibrated short-term and long term measures. Focus on internal reforms is necessary but the global factors should be given equal consideration. Like continuing BRICS dialogue to trade in INR
Strengthening rupee requires a combination of calibrated short-term and long term measures. Focus on internal reforms is necessary but the global factors should be given equal consideration. Like continuing BRICS dialogue to trade in INR
Suggestions to improve:
- Could strengthen by linking to **broader economic objectives** (e.g., achieving $5 trillion economy goal requires stable exchange rate to maintain investor confidence and import essential technology)
- Could reference **international cooperation frameworks** (e.g., G20 coordination on currency stability, BRICS New Development Bank's role in reducing dollar dependence)
Your answer demonstrates good understanding of rupee depreciation dynamics with relevant current data. However, it misses the critical examination depth demanded by the question and doesn't adequately address structural vulnerabilities. Strengthening analytical depth and policy specificity would significantly enhance your response.
Demand of the Question
- Causes behind rupee depreciation - both structural and immediate factors
- Critical examination of impact on Indian economy (positive and negative effects)
- Policy measures for exchange rate stability
- Link to global geopolitical tensions and structural vulnerabilities
What you wrote:
Rupee depreciation refers to a fall in value of Indian rupee relative to major foreign currencies. Indian rupee has been under pressure against US dollar in recent years dropping to around ₹93. INR became the worst performing Asian currency in 2025. Its causes are rooted in both internal and external factors.
Rupee depreciation refers to a fall in value of Indian rupee relative to major foreign currencies. Indian rupee has been under pressure against US dollar in recent years dropping to around ₹93. INR became the worst performing Asian currency in 2025. Its causes are rooted in both internal and external factors.
Suggestions to improve:
- Could strengthen by explicitly mentioning **structural vulnerabilities** as highlighted in the question (e.g., India's high import dependence on crude oil at 85% and persistent current account deficit averaging 1-2% of GDP)
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