Rupee Under Pressure: The Case for Letting Markets Decide

The Indian rupee depreciated approximately 9.6% in 2025-26, briefly breaching 95 per dollar. March alone saw a 4% fall. Rising crude oil prices from West Asian tensions widened India's import bill, increasing dollar demand and driving down the rupee.

The RBI has been selling dollars from its reserves to slow the rupee's decline. Reserves had crossed $700 billion at peak but have since fallen due to sustained intervention. The central bank's stated goal is preventing volatility, not defending a specific level — a distinction that is difficult to maintain in a unidirectional market.

Prolonged RBI intervention depletes reserves needed for future crises and prevents the natural corrective benefits of a weaker rupee — improved export competitiveness and CAD adjustment. Asian peers like Thailand and South Korea have allowed their currencies to weaken, putting India at a relative disadvantage if the rupee is held artificially strong.

India's CAD is widening due to elevated energy prices, strong import demand, and modest export growth. A weaker rupee is a natural corrective mechanism — raising import costs while boosting export revenues. RBI intervention delays this adjustment, potentially making the eventual correction larger.

The case is not for abandoning the exchange rate entirely, but for allowing managed depreciation rather than trend resistance. The RBI should reserve intervention for disorderly moves that threaten financial stability, not routine market-driven adjustment.