The rupee crossing the psychologically significant mark of 90 to the US dollar has once again ignited public anxiety and policy debate. Is this a sign of economic weakness, or a necessary adjustment in a turbulent global economy? More importantly, is India’s exchange rate being managed prudently — or is history in danger of repeating itself?
A break from the peg: what changed after 2024
Credit must be given where it is due. Under Governor Sanjay Malhotra, the Reserve Bank of India has managed the rupee far more flexibly than during the mid-2023 to late-2024 phase, when the currency was effectively pegged.
That earlier episode of fixity proved costly. By holding the rupee at an artificially strong level, competitiveness eroded and over $150 billion of foreign exchange reserves were burnt defending an overvalued currency. The inevitable outcome was a speculative attack once markets sensed misalignment. In contrast, over the past year, the RBI has allowed the rupee to move from around 85 to 90 per dollar, absorbing part of the shock from capital outflows.
Why is capital fleeing despite high growth?
This adjustment raises a deeper puzzle. With headline GDP growth exceeding 8 per cent, India should, in theory, be attracting global capital. Instead, foreign investors have pulled back. Several forces are at play: punitive US tariffs, a global reassessment favouring China, concerns about weak private investment, and scepticism around official growth estimates.
The RBI’s decision to let the exchange rate reflect some of these pressures is sound macroeconomics. However, from mid-2025 onwards, old instincts resurfaced. Official data and estimates suggest that since June 2025, the RBI has sold $30–35 billion in the spot market and intervened heavily in the forward market as well. This raises a critical question: why expend reserves when inflation risks are negligible?
The politics and distribution of a strong rupee
Resistance to rupee depreciation largely comes from two constituencies. The first includes corporates with dollar borrowings and wealthier households facing overseas education and travel costs. The second comprises nationalist voices for whom a weakening currency is equated with national decline.
This framing ignores distributional reality. A stronger rupee benefits a relatively small, affluent segment, while a weaker rupee protects millions of workers in labour-intensive export sectors such as textiles, gems and jewellery, fisheries, and apparel — sectors already battered by Donald Trump’s steep tariffs. Exchange rate policy is not neutral; it redistributes income across society.
Learning from China’s currency strategy
For nationalist critics, the most instructive comparison lies across the Himalayas. Despite running persistent current account surpluses and dominating global exports, China has allowed its real exchange rate to depreciate by around 12.5 per cent since 2020. This has occurred even as global pressure mounted for appreciation.
Notably, this strategy has not relied on overt central bank action by the People’s Bank of China, but through state-owned commercial banks smoothing market pressures. India, by contrast, has allowed only about a 5.5 per cent real depreciation, despite a weaker external position.
How weak should the rupee be?
Two benchmarks are instructive. First, relative to its five-year average, India’s real exchange rate has declined by about 5 per cent, compared to China’s 12 per cent. Second, India faces an effective tariff disadvantage of roughly 25 per cent due to US trade actions. Adjusting for either competitiveness gap suggests that a further 10 per cent depreciation may be necessary.
In practical terms, a gradual movement towards 100 rupees per dollar — rather than rigid defence around 90 — could act as a quasi-subsidy for exporters at a time when fiscal support is limited. Markets appear to be pushing in this direction, but policy resistance risks squandering the opportunity.
Why flexibility matters for reform
India is undertaking structural reforms aimed at boosting long-term growth and private investment. A genuinely flexible exchange rate would amplify their impact, front-loading gains in exports and employment. Preventing adjustment through intervention, by contrast, amounts to self-inflicted damage.
History offers a cautionary tale. As argued in A Sixth of Humanity, the Indian state has often been introspective but slow to correct repeated mistakes. The rupee peg of 2023-24 was a textbook case of mismanagement. While today’s policy is an improvement, repeating even milder versions of past errors in 2026 would be difficult to justify.
What to note for Prelims?
- Difference between fixed, managed float, and flexible exchange rate regimes
- RBI’s use of spot and forward market interventions
- Concept of real effective exchange rate (REER)
- Distributional effects of currency appreciation and depreciation
What to note for Mains?
- Critically evaluate India’s exchange rate management in recent years.
- Discuss how currency policy affects export competitiveness and employment.
- Compare India’s rupee strategy with China’s yuan management.
- Analyse the trade-off between reserve depletion and exchange rate stability.
