RBI shores up rupee. It may be good to let it be

Context & The Gist

The Indian rupee recently experienced a sharp decline against the US dollar, losing 3% since November 15th, prompting intervention by the Reserve Bank of India (RBI). The RBI sold dollars, leading to a 0.7% appreciation of the rupee. However, the article argues that, given India’s low domestic inflation and subdued crude oil prices, allowing for a controlled depreciation of the rupee might be beneficial, as artificial propping up through interventions is unsustainable in the long run.

The central thesis is that the RBI’s role should be limited to managing excessive volatility, not targeting specific exchange rate levels. The rupee’s value should be determined by fundamental economic factors like trade balance and capital flows.

Key Arguments & Nuances

• RBI Intervention: While understandable to curb panic, interventions are not a long-term solution. They merely moderate fluctuations, not dictate value.
• Inflationary Pressure: Low domestic inflation provides a window for rupee depreciation without triggering significant price increases.
• Market Determination: The rupee’s true value is dictated by export-import dynamics and capital inflows – factors the RBI cannot control directly.
• Volatility Management: The RBI’s stated policy is to prevent “abnormal or excessive volatility,” but the definition of “excessive” remains subjective. A rapid slide (like 90 to 91 in 10 days) can trigger panic.
• Trade Deficit & Capital Flows: The underlying cause of rupee depreciation is linked to trade imbalances and fluctuations in foreign investment.

UPSC Syllabus Relevance

• Indian Economy (GS Paper III): Exchange Rate, Balance of Payments, Monetary Policy, RBI Functions.
• Government Budgeting (GS Paper III): Impact of exchange rate fluctuations on government finances and trade.
• International Relations (GS Paper II): Global economic factors influencing the Indian economy.

Prelims Data Bank

• RBI Act, 1934: Governs the operations of the Reserve Bank of India.
• REER (Real Effective Exchange Rate): A measure of a country’s currency value against a weighted average of its trading partners’ currencies, adjusted for inflation.
• Inflation Targeting: The RBI currently follows flexible inflation targeting, aiming to maintain inflation within a 2-6% range.
• Current Account Deficit (CAD): A situation where a country imports more goods, services, and capital than it exports.

Mains Critical Analysis

The article highlights a crucial debate in macroeconomic management: intervention versus market determination. The RBI’s intervention, while providing short-term stability, can distort market signals and deplete foreign exchange reserves. A depreciating rupee, under the current economic conditions (low inflation, subdued oil prices), can boost exports and reduce the trade deficit, contributing to long-term economic health.

PESTLE Analysis

• Political: Government policies regarding trade and foreign investment significantly impact the rupee’s value.
• Economic: India’s economic growth, inflation rate, and trade balance are key determinants.
• Social: Consumer sentiment and investment patterns influence capital flows.
• Technological: Fintech innovations and digital payments can affect capital movement.
• Legal: Regulations governing foreign exchange transactions and capital controls.
• Environmental: Global commodity prices (especially oil) have a significant impact.

Critical Gap: The article doesn’t delve into the potential impact of a weaker rupee on external debt servicing costs. While exports may benefit, companies with significant dollar-denominated debt could face increased financial burdens.

Value Addition

• S.S. Tarapore Committee (1997): Recommended a phased move towards capital account convertibility, emphasizing the need for macroeconomic stability.
• Jagdish Bhagwati’s Argument: Advocated for a flexible exchange rate regime to enhance export competitiveness.
• SC Judgement (2013): In Reserve Bank of India v. Kishorilal Purshottamdas Maneklal, the Supreme Court upheld the RBI’s power to regulate foreign exchange transactions.

Context & Linkages

This earlier article (Dec 4, 2025) provides the immediate backdrop to the current situation. It details the factors contributing to the rupee’s fall – trade deficit, falling exports, and capital outflows – and echoes the argument against artificial intervention. It highlights the unsustainable nature of defending the rupee without addressing the underlying economic imbalances.

This article (Nov 27, 2025) emphasizes the need to reduce India’s dependence on oil imports to stabilize the rupee. It underscores the vulnerability of the Indian economy to external shocks, particularly fluctuations in global oil prices, and the importance of diversifying energy sources.

This article (Dec 2, 2025) directly supports the current editorial’s argument, stating that a falling rupee isn’t necessarily detrimental. It points to the declining Real Effective Exchange Rate (REER) and suggests adjusting exchange rate policy to reflect this reality.

The Way Forward

• Address Trade Deficit: Promote exports through incentives and trade agreements, while curbing non-essential imports.
• Attract Capital Flows: Improve the investment climate to attract foreign direct investment (FDI) and portfolio investment.
• Diversify Energy Sources: Reduce dependence on oil imports by investing in renewable energy.
• Strategic Intervention: Limit RBI intervention to managing excessive volatility, not fixing exchange rate levels.
• Structural Reforms: Implement reforms to enhance productivity and competitiveness in the Indian economy.