Context & The Gist
The Indian rupee recently crossed the 90 mark against the US dollar, prompting debate on whether the Reserve Bank of India (RBI) should intervene to prop up the currency. The article argues that the RBI should prioritize controlling inflation through monetary policy rather than artificially defending the rupee, as a weaker currency can boost exports and act as a necessary economic shock absorber.
Key Arguments & Nuances
- Exchange Rate as a Shock Absorber: A depreciating rupee can help offset external shocks and improve export competitiveness, particularly in a challenging global trade environment.
- Trade Deficit & Capital Flows: The rupee's decline is driven by a widening trade deficit (due to contracting exports and surging imports, including gold) and outflows of foreign portfolio investment.
- Inflationary Pressures: With current inflation at low levels (0.25% in October), the impact of a weaker rupee on domestic prices is minimal, reducing the urgency for intervention.
- Liquidity Implications: Intervening in the currency market can affect liquidity conditions within the economy, potentially creating unintended consequences.
- Policy Recommendations: The article advocates for a calibrated depreciation of the rupee, alongside government policies to enhance productivity, export competitiveness, and secure trade deals.
UPSC Syllabus Relevance
- Indian Economy (GS Paper III): Exchange rate management, balance of payments, foreign exchange reserves, and monetary policy.
- International Relations (GS Paper II): Impact of global trade dynamics and geopolitical factors on the Indian economy.
- Government Policies & Interventions (GS Paper II): Role of the RBI and government in managing economic stability and promoting growth.
Prelims Data Bank
- Rupee Depreciation (Dec 2025): Fell by over 6% against the US dollar in the past year, breaching the 90 mark.
- Trade Deficit (October 2025): Reached $41.7 billion, a significant increase.
- Gold Imports (October 2025): Soared to $14.7 billion, compared to $4.9 billion a year prior.
- FPI Outflows (YTD 2025): Foreign Portfolio Investors withdrew around $17 billion from Indian markets.
- FDI Inflows (Q2 2025): Net inflow of Foreign Direct Investment stood at $2.9 billion.
- RBI Forex Reserve Depletion (H1 2025): $6.4 billion depletion in foreign exchange reserves.
Mains Critical Analysis
The article highlights a crucial debate in macroeconomic management: the trade-off between exchange rate stability and other economic objectives. The core issue revolves around whether the RBI should actively intervene to manage the rupee's value or allow market forces to determine the exchange rate.
Challenges
- Global Headwinds: The global economic slowdown and protectionist measures (like Trump’s tariffs) pose significant challenges to Indian exports.
- Capital Flow Volatility: Dependence on volatile foreign portfolio investment makes the rupee vulnerable to sudden reversals.
- Trade Deficit: A persistent trade deficit puts downward pressure on the rupee and requires careful management.
Opportunities
- Export Competitiveness: A weaker rupee can make Indian exports more competitive in the global market.
- Inflation Control: Maintaining a focus on inflation control allows the RBI to avoid diverting resources to currency defense.
- Structural Reforms: Government policies aimed at improving productivity and export competitiveness can address the root causes of the trade deficit.
Value Addition
- RBI’s Approach: The RBI generally follows a managed float exchange rate regime, intervening only to manage volatility and prevent disorderly market conditions.
- Tariff Wars: The US-China trade war and other protectionist measures have significantly impacted global trade flows and exchange rates.
- Quote: “Exchange rates are a price, not a target.” – Alan Greenspan (Former Chairman of the Federal Reserve).
The Way Forward
- Immediate Measure: Allow for a calibrated depreciation of the rupee, intervening only to smooth out excessive volatility.
- Long-term Reform: Implement structural reforms to boost productivity, enhance export competitiveness, and diversify export markets. Prioritize negotiating and finalizing trade deals to improve market access.