Context & The Gist
The recent fall of the Indian Rupee against major global currencies, triggered by global economic shifts and geopolitical factors like potential US tariffs and Chinese export redirection, is not necessarily detrimental. The article argues that a slightly undervalued Rupee can boost exports, mitigate the impact of cheap imports, and act as an effective shock absorber for the Indian economy.
Key Arguments & Nuances
- Rupee Depreciation & REER: The Rupee has depreciated against the US dollar, Euro, British Pound, Japanese Yen, and Chinese Yuan. This is reflected in a decline in the Real Effective Exchange Rate (REER) from 108.1 in November 2024 to 97.5 in October 2025, indicating a move from overvaluation to undervaluation.
- Trade Implications: An undervalued Rupee is beneficial for foreign trade. It can help reduce the record merchandise trade deficit of $41.7 billion (October) by boosting exports and countering the threat of cheaper Chinese imports.
- Shift in Policy Approach: The RBI, under the current governor, has adopted a more flexible exchange rate policy, allowing for calibrated depreciation, a departure from previous reliance on overvalued exchange rates and trade restrictions.
- Global Economic Factors: The depreciation is partly driven by easing inflation and, more significantly, by concerns over potential trade disruptions caused by US tariffs and increased Chinese exports.
- Current Account Deficit: India faces a growing current account deficit due to a mismatch between exports and imports, necessitating an adjustment in exchange rate policy.
UPSC Syllabus Relevance
- Indian Economy (GS Paper III): Exchange rate management, balance of payments, trade deficit, and their impact on the Indian economy.
- International Relations (GS Paper II): Impact of global trade policies (like US tariffs and Chinese trade practices) on India.
- Government Policies & Interventions (GS Paper II/III): Role of the RBI in managing the exchange rate and its implications for economic stability.
Prelims Data Bank
- REER (Real Effective Exchange Rate): A weighted average of bilateral exchange rates, adjusted for relative price levels. It measures a country’s currency value against a basket of its trading partners’ currencies.
- RBI Governor: Current Governor is Shaktikanta Das (as of Dec 2025).
- Current Account Deficit (CAD): A condition where a country imports more goods, services, and capital than it exports.
Mains Critical Analysis
The article highlights a crucial shift in India’s economic policy – moving away from managing the exchange rate to achieve specific goals (like controlling inflation or protecting domestic industry) towards allowing market forces to play a greater role. This is a positive development, as artificially maintaining an overvalued exchange rate can harm export competitiveness and exacerbate trade imbalances. However, the volatility of the Rupee remains a concern. While a calibrated depreciation is beneficial, excessive or rapid depreciation can lead to imported inflation and financial instability.
Challenges
- Imported Inflation: A weaker Rupee can increase the cost of imports, potentially fueling inflation, especially for essential commodities.
- External Debt Burden: Depreciation increases the Rupee cost of servicing external debt.
- Capital Flight: Excessive depreciation could trigger capital outflows, further weakening the Rupee.
Opportunities
- Export Competitiveness: A weaker Rupee makes Indian exports more competitive in the global market.
- Reduced Trade Deficit: Increased exports and potentially reduced imports can help narrow the trade deficit.
- Attracting Investment: A competitive exchange rate can attract foreign investment.
Value Addition
- Tariff Wars & Trade Protectionism: The article references the potential impact of US tariffs and Chinese trade practices. This highlights the growing trend of protectionism globally.
- Optimal Exchange Rate Regime: There is an ongoing debate among economists about the optimal exchange rate regime for India – whether a fixed, floating, or managed float.
- Quote: “Exchange rates are an effective shock absorber and a better tool to correct trade imbalances and improve competitiveness than tariffs and subsidies.” – The Indian Express Editorial
The Way Forward
- Immediate Measure: Continue with the current policy of calibrated depreciation, allowing the Rupee to adjust to market forces while intervening to manage excessive volatility.
- Long-term Reform: Focus on structural reforms to boost exports, improve productivity, and reduce reliance on imports. This includes investing in infrastructure, skill development, and promoting innovation.