Why the INR is Falling? The Structural Drivers & Risks of Hyperinflation

Introduction

India faces a severe economic challenge marked by the persistent depreciation of the Indian Rupee (INR) and growing hyperinflation risks. These issues are symptoms of deeper structural weaknesses rather than mere results of geopolitical shocks or short-term external factors. Understanding the root causes—energy import dependence, weak export sector with poor value addition, volatile capital flows, limited monetary and fiscal policy space—is crucial to grasping why the INR is trapped in a death spiral and inflation threats are intensifying. This essay explores these underlying structural drivers, their interplay, and their collective impact on India’s macroeconomic stability.

Structural Overdependence on Imported Energy and Raw Materials

India’s chronic reliance on imported fossil fuels and raw materials is a fundamental structural flaw. Despite global trends toward energy transition, India continues to import over $200 billion annually in crude oil, petroleum products, and natural gas due to insufficient domestic production capacity and slow renewable adoption. This inelastic demand for essential energy inputs creates an unavoidable import bill, which pressures foreign exchange reserves and widens the trade deficit indefinitely.

The rupee’s depreciation further magnifies this challenge by increasing the rupee cost of these indispensable imports, deepening the external imbalance. Because India cannot quickly curtail energy consumption, the trade deficit is structurally large and persistent, setting the stage for currency vulnerability and inflationary pressure.

Weak Export Sector and Poor Value Addition on Imports

India’s export sector is structurally weak, lacking diversification and technological sophistication, heavily reliant on low-margin products vulnerable to international competition. The economy imports large quantities of intermediate and capital goods but carries out minimal value addition before re-exporting finished products. This phenomenon results in negative value addition on imports—India essentially exports goods embedded with large foreign input costs, inflating its import bills relative to export earnings.

This structural mismatch means exports do not generate sufficient foreign currency to offset escalating imports. Furthermore, structural issues such as poor infrastructure, high financing costs, limited innovation, and rigid regulatory environments stifle export growth. Recent trade tensions, tariffs, and global uncertainties exacerbate these weaknesses but are not root causes. The fundamental problem remains India’s export incapacity to build a robust, value-added, globally competitive sector capable of narrowing the trade deficit sustainably.

Death Spiral of the INR: Mechanism and Structural Implications

The depreciation of the INR is not a random fluctuation but a self-reinforcing “death spiral” driven by these structural factors. As the rupee weakens, import prices increase in rupee terms, worsening the already large trade deficit. This necessitates more foreign currency to pay for the same quantity of imports, further deteriorating the trade balance.

Concurrently, weak exports fail to generate enough forex inflows, leaving a growing current account deficit that must be financed by volatile capital flows or foreign exchange reserves. However, capital inflows—especially foreign portfolio investments—have reversed sharply in recent years, declining from robust positives in 2021-22 to sustained outflows exceeding $16 billion in 2025. This exacerbates forex scarcity, accelerating rupee depreciation.

The Reserve Bank of India’s foreign exchange reserves have fallen significantly, limiting its intervention capacity. As interventions wane, market speculation and investor uncertainty increase, triggering aggressive sell-offs and accelerating the spiral downward. The “death spiral” is thus a product of entrenched structural trade imbalances and weak capital inflows, making it extremely challenging to control or reverse.

Volatile and Insufficient Capital Inflows

India’s reliance on foreign portfolio investment exposes the economy to rapid and unpredictable capital flight. While foreign direct investment has been steadier, it is insufficient to cover the massive current account deficits and replenish foreign reserves. The sharp reversal in portfolio flows drains forex resources, destabilizes market confidence, and magnifies currency volatility.

This dependence on short-term capital flows adds systemic risk, intensifying the currency’s vulnerability to external shocks or investor sentiment swings, perpetuating the death spiral. Without a stable and diversified capital base, India’s macroeconomic framework remains fragile.

Monetary and Fiscal Policy Constraints

India’s constrained policy environment further complicates crisis management. The Reserve Bank of India operates under a strict inflation-targeting regime, limiting its ability to pursue aggressive monetary easing or tightening during currency shocks. Rising fiscal deficits, partly fueled by subsidy commitments and currency depreciation-induced debt servicing costs, reduce the government’s flexibility.

Declining foreign exchange reserves reduce the RBI’s ability to counter sharp rupee depreciations through market interventions. This weakens the overall shock-absorbing capacity of monetary and fiscal authorities. Consequently, inflation expectations risk becoming unanchored, raising the specter of wage-price spirals and potentially hyperinflation if left unchecked.

Conclusion

The death spiral of the INR and the looming risk of hyperinflation arise from deeply entrenched structural economic vulnerabilities. India’s persistent energy import dependence, combined with a weak export sector characterized by poor value addition on imports, creates a structural trade deficit. This deficit, compounded by volatile and insufficient capital inflows and constrained monetary and fiscal policy levers, generates a self-reinforcing currency depreciation cycle.

Record deficits and inflation are symptoms revealing the severity of these fundamental problems rather than isolated causes. Geopolitical factors, tariffs, and global commodity price volatility may amplify the crisis but do not constitute the root drivers. To stabilize the INR and avert hyperinflation, India must urgently implement comprehensive structural reforms focused on energy diversification, export upgrading and value addition, financial market development, and disciplined fiscal and monetary management. Without decisive action on these fronts, India risks a protracted period of economic instability with severe consequences for growth and public welfare.