How Union Budget Impacts Rupee: Can It Stop It From Sliding Further?

With Finance Minister Nirmala Sitharaman set to present the Union Budget 2025 on February 1, the country is closely watching how it will impact the rupee, which has been under pressure in recent months. 

Industry leaders have raised concerns over the currency's decline to record lows against the US dollar and have called for strategic reforms to tackle fiscal challenges. Key focus areas include taxation changes and measures to support the rupee's stability.

“With the rupee hitting record lows against the dollar, concerns with regard to fiscal management have also come up, so it will be interesting to see how the Finance Minister addresses this major challenge,” Aamar Deo Singh, SVP Research at Angel One, told news agency ANI.

Can the Budget impact the rupee?

Yes, the Budget can impact the rupee. Here are some ways:

Fiscal Deficit: A higher fiscal deficit can lead to more government borrowing, causing inflation and weakening the rupee. But a lower fiscal deficit boosts investor confidence and helps stabilise the rupee. 

Tax Policies: Tax changes, like higher capital gains taxes, can impact foreign investments. After the 2024 Budget increased taxes, foreign investors sold nearly $1 billion in Indian equities within two days, weakening the rupee.

Import Duties: Changes in import duties can impact the demand for foreign currencies. Higher import duties may lower dollar demand by reducing imports, helping stabilise the rupee. EY's Chief Policy Advisor DK Srivastava suggested that raising import duties could help curb dollar demand and prevent the rupee from sliding further, PTI reported.

Market Sentiment: Budget announcements can affect investor sentiment. Positive policies can attract foreign investment, strengthening the rupee, while negative ones may lead to capital outflows and weaken the rupee. For example, after the government raised capital gains taxes in 2024, the rupee hit a record low against the US dollar due to a shift in market sentiment.