Rupee Management and Economic Implications
The recent fluctuations in the rupee's value, particularly its breach of the psychological "90" mark against the dollar, have caused widespread concern and debate about its management and implications for the Indian economy.
Rupee Management
- The rupee is currently better managed now compared to the 2023-2024 period.
- The previous regime maintained a fixed rupee rate to benefit large foreign currency borrowers, resulting in a loss of over $150 billion in reserves.
- This strategy negatively impacted the economy's competitiveness, leading to a speculative attack due to the rupee being over-valued.
- The new RBI regime has adopted a more flexible approach, allowing for partial capital flight reflection in the exchange rate.
Foreign Capital Flight and Exchange Rate Dynamics
- Despite India’s purported 8.2% economic growth, foreign capital is exiting the country.
- The RBI has intervened by selling dollars worth $30-35 billion in the spot market and up to $30 billion in the forward market since June 2025.
Interest Groups and Exchange Rate Management
- Two main interest groups oppose rupee depreciation:
- Indians with dollar expenditures, including companies with dollar borrowings, and families sending children abroad for education.
- Nationalist politicians viewing a declining rupee as a sign of weakness.
Distributional Consequences and Policy Recommendations
- A weaker rupee benefits labor-intensive industries (fisheries, gems and jewellery, clothing) and protects jobs, while a stronger rupee benefits wealthier sections.
- To counteract the adverse effects of tariffs and competitiveness with China, it's suggested that the rupee should weaken to 100 per dollar gradually.
Historical Lessons and Policy Mistakes
- The Indian state is often reflective and self-critical, but fails to implement corrective measures based on historical lessons.
- The mistakes made during 2023-24 should not be repeated, and a truly flexible exchange rate policy should be adopted to enhance reform impacts.
Conclusion
- India needs to embrace a competitive currency strategy to support economic reforms and prevent self-inflicted economic damage.
