By – Aashrith Rajesh

Abstract

The Indian Rupee’s fall to record lows against the USD in 2025 has coincided with strong economic growth, giving rise to questions as to what is actually happening. This article argues that such coexistence is common in emerging markets where real outputs and incomes continue to rise despite nominal currency depreciation. By examining the “Dollar illusion”, distinguishing between nominal exchange rates and economic fundamentals, and assessing India’s external balances, the article shows that India’s economy remains resilient.

Introduction

The Indian Rupee has slid to a record low against the U.S Dollar, breaking the 90 per Dollar mark. The irony remains that the Indian economy has been growing throughout this time and is considered as one of the fastest growing economies. This coexistence of growth and currency depreciation is neither unusual nor paradoxical. It simply reflects a classic emerging market pattern where output, incomes and investment rise faster than the rate at which the currency is depreciating. This is driven by a strong domestic demand, supported by manageable external balances rather than solely by exchange rates. The Indian economy is worth somewhere around $4.3 trillion representing around 3.9% of the world economy.

Despite this growth, the Rupee has continued to depreciate through 2025. Exchange rate data indicates that the USD/INR averaged around ₹87 while weakening to  above ₹90 by December. This depreciation has been attributed primarily to global Dollar strength, higher U.S rates and tariffs.

The Dollar Illusion

One of the most common pitfalls while analysing exchange rates is evaluating growth solely on Dollar denomination. When the Rupee weakens, converting the GDP to USD mechanically reduces it’s nominal Dollar value even if the actual quantity of goods and services produced increases. This is what economist refer to as the Dollar Illusion.

Development economists argue that purchasing power parity (PPP)- adjusted measure provides a more meaningful measure of an economy’s real scale and living standards over the market exchange rate conversions. This is because conversions through market rates are subject to exchange rate fluctuations that in most cases has little to do with domestic productive activity. Hence, India’s Dollar-values GDP trajectory appears to be weaker in 2025, while real growth remains strong.

Why growth and Depreciation can coexist

It is common to assume that if a country’s currency is weakening, its economy must also be weakening. However, economic growth and currency movements measure very different things. Economic growth refers to the increase in the production of goods and services within a country, measured in real terms after adjusting for inflation. Currency depreciation however only shows how much the domestic currency is worth relative to another currency, such as the USD. As IMF makes it clear that India has continued to grow strongly because domestic demand, investment and output have expanded, while the Rupee has depreciated against the USD.

A key economic distinction of nominal exchange rate and real purchasing power helps explain the coexistence. The nominal exchange rate tells us how many Rupees are needed to buy $1 but fails to tell us how much people can buy with their incomes within India. What matters for living standards is whether real incomes and productivity are rising faster than prices. The World Bank emphasised that improvements in productivity and domestic activity can raise real income even if currency weakens. 

Currency depreciation can coexist with growth because it supports certain parts of the economy. When the Rupee weakens, Indian exports become cheaper for foreign buyers, which can increase the demand for services like IT, software and business outsourcing. Deloitte India noted that Rupee depreciation has helped maintain export competitiveness and supported services export while increasing costs of imports.

Is this a problem in disguise?

If currency depreciation was a signal for economic problems, it would create severe imbalances externally. However, India’s external position in 2025 remains moderate relative to GDP and was cushioned by strong services export and remittances. India’s external balances allow the Rupee to adjust gradually without triggering a balance of payments crisis.

When the Rupee weakens, exporters are usually the first beneficiaries. A weaker Rupee means that Indian goods and services become cheaper for foreign buyers, making them more competitive in global markets. This particularly helps sectors such as IT services, software exports, pharmaceuticals, where revenues are earned in Dollars but costs are in Rupees. Additionally, households receiving remittances from abroad benefit from this. When Dollars or other foreign currencies are converted into Rupees, a weaker Rupee means more money. 

However, there do exist some losers when the currency depreciates. The biggest of them are those who are dependent on imports. When the Rupee depreciates, these imports become more expensive, thus raising fuel prices and therefore increasing costs across the economy. For example, crude oil is usually bought in USD, when the Rupee falls, oil prices increase. This increases the overall prices in the economy. Another group which comes under pressure would be those companies with foreign currency debt. Firms that have borrowed in Dollars must repay more Rupees when the currency weakens, increasing their financial burden.

Conclusion

India’s experience in 2025 shows that a weakening currency and strong economic growth are not mutually exclusive. The Rupee’s depreciation reflects global financial conditions and structural trade realities rather than a collapse in domestic fundamentals. At the same time, real output, investment and income have continued to expand, driven by domestic demand and supported by manageable external balances.

Exchange rates capture relative prices, not welfare, productivity or the direction of structural change within an economy. While currency depreciation creates clear distributional effects, benefiting exporters while raising costs for import dependent sectors. The more important question is not how strong the Rupee is against the Dollar, but where real incomes and economic resilience are improving overtime. On that measure, India’s growth in 2025 remains intact.

About the Author

Aashrith Rajesh is a third-year law student from Jindal Global Law School (JGLS) particularly interested in Constitutional Law, Contracts Law and Intellectual Property Law. He enjoys reading on topics related to the world of finance and economics.

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