Falling Rupee Is Not So Alarming
The India Commentary view
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By Our Editorial Team
First publised on 2025-12-05 14:50:56
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The India Commentary view
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The rupee's recent slide past 90 to the US dollar has triggered predictable hand-wringing. Yet, stripped of emotion, the numbers present a more nuanced story. Over the past year, the rupee has weakened 5-6 per cent against the dollar and even more sharply against the euro and the pound. In nominal terms, this seems alarming. But juxtapose this with India's unusually low inflation - now lower than that in the US, UK, Eurozone and Japan - and a different picture emerges. The RBI's real effective exchange rate index has fallen from a clearly overvalued 108 in late 2024 to below 98 now. By any measure, the rupee today is not over-stretched, but mildly undervalued.
This is no lamentable development. At a time when India's merchandise trade deficit has ballooned to a record $41 billion in October - exacerbated by a "Trump tariff shock" and China's aggressive redirection of excess industrial capacity - an artificially strong currency would have been self-defeating. A weaker rupee, within reason, is the economy's natural buffer. Unlike tariffs, bans and other reflexive trade measures that New Delhi has too often relied on, exchange rate flexibility works silently to restore competitiveness without distorting markets.
The RBI under its current leadership appears to grasp this. The central bank has refrained from heavy-handed intervention, allowing a calibrated depreciation while ironing out volatility. This approach is backed by two realities: a benign inflation backdrop that limits concerns of imported inflation, and a widening current account gap fuelled by falling exports, soaring gold purchases, and sustained portfolio outflows. Defending the currency at all costs - a temptation India has succumbed to in the past - would drain reserves without addressing the structural imbalance between exports and imports.
Monetary policy, too, must not be conscripted into currency defence. With consumer inflation at 0.25 per cent, the MPC's role remains what it should be: anchoring price stability rather than chasing an arbitrary exchange-rate target.
What is required instead is a twin-track response: steady, predictable exchange-rate management by the RBI, and a renewed policy focus by the government on productivity, logistics efficiency, and long-pending trade agreements. A mildly weak rupee is not the problem; it is a signal. The real task lies in raising India's competitiveness so that exporters can leverage the currency advantage, and the economy need not rely on depreciation as a crutch.
The lead image was created using AI
