Stabilising a nation’s currency has its costs as well as benefits. India’s rupee may not be especially weak, but public opinion and RBI’s defence forces you to rethink.
The rupee depreciating and being at an all time low of ~$95 is not news anymore. What’s a little surprising is the emotional turmoil around it. Most seem unhappy, associating this trend with a weakening economy structure and rising lifestyle expenses. The rupee is down 5.8% against the dollar so far this year. It was weak in 2025 too, but the trend is not surprising. In nominal terms, the rupee always depreciates steadily against the dollar, as it should, given that India targets inflation of 4% and the US targets 2%.
In real terms, against a broad basket of other economies, the rupee is most notable for its stability, albeit trading now at the lower end of its range.
What most people fail to notice is that it’s not just India. Pretty much every currency in Asia is suffering. If you want to see an economic policy train wreck then take a look at Indonesia. The rupiah, down more than 7 per cent this year despite rate rises, is the actual most fragile currency in Asia. Japan is suffering from serious yen weakness, partly due to incontinent fiscal policy. Even in Korea, where the economy is doing well thanks to semiconductors, the won is sliding as foreign investors repatriate their profits.
The specifics differ from country to country but all are oil importers. The Iran war shock has worsened their terms of trade. All, to varying degrees, are dealing with capital outflows from investors who want to buy booming US tech stocks. Some currency depreciation is inevitable. Of course that doesn’t make it pleasant. A weak currency makes imports more costly and foreign debts more expensive to service.
If we take a look at the Real Effective Exchange Rate (REER), the real picture comes through – the rupee has been more or less stable over the long run.
Should RBI defend the rupee indefinitely?
The Reserve Bank of India’s last MPC meeting was all about the rupee, with the central bank unveiling a set of measures to attract capital inflows, alongside its decision to hold interest rates. For example, the government will allow foreign investors to buy its bonds with maturities as long as 40 years, and exempt them from withholding tax.
In general, however, this kind of close currency management is a lot of effort for dubious reward. As the IMF said in its most recent Article IV consultation with India: “Allowing greater exchange rate flexibility would help absorb external shocks, reduce the need for costly reserve accumulation, encourage FX market development, strengthen incentives for firms to hedge currency risk and help moderate liquidity fluctuations in the domestic financial system.”
A terms-of-trade shock, such as increasing oil prices, reduces a country’s wealth. If you don’t use the exchange rate to make adjustments, you will ultimately need to reduce domestic demand in another way, most likely by increasing interest rates.
With the currency under pressure, it may be the wrong moment to change policy on the rupee. Food for thought is, however, that maybe the Indian public would worry less about rupee weakness if the authorities didn’t seem so desperate to avoid it.
