Having crossed some psychological “90” barrier, the rupee is once again in the news and once again giving rise to angst and confusion. What is happening and is the rupee being well-managed?
First, to give credit where it is due. The rupee is better managed today under Governor Sanjay Malhotra and his team than it was in the period mid-2023-late 2024 (the period of the peg). Then, the rupee was fixed for a considerable period based on motivations that were obscure, perhaps unsavoury, in favouring large foreign currency borrowers (Figure 1). The fixity worsened the competitiveness of the economy and was only sustained by a loss of over $150 billion in valuable reserves. In the end, it provoked a speculative attack against a rupee that had become clearly over-valued.
In contrast, in the last one year, the new RBI regime has managed the rupee better and more flexibly. There is the important question of why foreign capital is bolting out of India when, in fact, there ought to be a stampede into the country if the economy is supposedly growing at a torrid 8.2 per cent, much faster than any comparable country. In the event, the RBI has partially allowed this capital flight to be reflected in the exchange rate, which has declined from 85 rupees to the dollar to 90 rupees to the dollar over the last year.
Second, however, old habits persist. From the middle of 2025, when pressures on the rupee re-emerged for a host of external (Trump tariffs, investor re-assessment in favour of China) and domestic reasons (weak private investment and doubts about official growth numbers), the RBI started intervening again to partially defend the rupee. Based on official data and some estimates for November and December, it seems that since June 2025, the RBI has sold dollars in the spot market to the extent of $30-35 billion and may have intervened in the forward market to the extent of up to $30 billion.
This raises the question: Why, oh why? Losing reserves to prevent high inflation is one thing but doing so when there is no such risk is damaging. One might speculate that there are two interest groups arguing against a rupee decline. First are those Indians who have dollar expenditures, including large companies that have borrowed in dollars, and middle class and rich households who want to send their children abroad for education. The second group are nationalist politicians for whom a declining rupee is a sign of weakness.
The response of policy-makers to the former group must be to highlight the plight of the tens of millions of workers in labour-intensive industries (fisheries, gems and jewellery, and clothing) all across the country who have lost or are at risk of losing their jobs and livelihoods because of the devastating Trump tariffs. It is undeniable that the exchange rate has serious distributional consequences. And in this instance, a weaker rupee protects millions of the poor, while a strong rupee favours the rich few.
The response to the nationalists must be: Look at the uber-nationalist country across the Himalayas and draw the right lesson. As Figure 2 shows, despite the relentless march of the Chinese export juggernaut, despite China running massive current account surpluses and despite the world railing at these outcomes, China’s real exchange rate has depreciated by about 12.5 per cent since January 2020. This is despite pressure on the Chinese currency to become stronger, which China is actively resisting not via intervention by the central bank (PBOC) but by state-owned commercial banks. In contrast, the rupee has only depreciated about 5.5 per cent despite a much weaker external position.
The reality is that protecting the job-intensive export sector requires a much weaker currency. How much weaker? Take some illustrative calculations. Figure 2 shows that India’s real exchange rate has declined relative to the average of the last five years by about 5 per cent while China’s has by about 12 per cent. An alternative calculation is that India has been burdened by a punitive Trump tariff of 25 per cent (over and above competitor countries). Whether India needs to catch up with Chinese competitiveness or needs an exchange rate to offset the punitive tariffs, a further 10 per cent decline in the rupee seems almost necessary, especially given that there has been very little fiscal support from the government. In that case, a rupee at 100 to the US dollar, occurring gradually over the next few months, rather than a rupee that is kept close to 90, is the minimum that the economy and its export sector needs.
The irony is that markets are trying to do a desirable job that policy makers have themselves been unable or unwilling to (a rupee depreciation is effectively a subsidy to exporters); instead of sitting back and availing themselves of the benefits, vested interests and politicians are actually thwarting markets to the detriment of the economy. This is self-inflicted damage. Also, the government should allow the RBI to manage a truly flexible exchange rate policy because it is undertaking a number of desirable reforms whose impact can be magnified and brought forward by a more competitive currency.
The tragedy is that we don’t seem to learn the lessons from history and experience. In a recent book, A Sixth of Humanity, that one of us co-authored, we found that over 75 years, the Indian state had been remarkably self-reflecting, admirably self-flagellating, but rarely self-correcting. The last episode of rupee fixity (under the previous RBI regime) was a textbook case of how NOT to manage the currency — unconscionable and damaging as discussed earlier. While the exchange rate policy has improved this time around, it could be much better. Or to put it both more generously and more critically, it is understandable if the Indian state and its institutions commit mistakes and occasionally forget the distant past. But they should not commit the same old mistakes, especially those of recent history. In 2026, it would be unforgivable if rupee policy were to repeat the egregious errors of 2023-24.
Anand is Visiting Fellow, Madras Institute for Development Studies, Felman is Head, JH Consulting, and Subramanian is Senior Fellow, Peterson Institute for International Economics and co-author of A Sixth of Humanity: Independent India’s Development Odyssey