A Nervous Rupee Meets an Uncomfortable Silence

The conversations drifting across cafés, airport lounges, and WhatsApp groups this winter share a strikingly similar rhythm. They begin with the lament of rising travel costs, framed not by hotel tariffs or flight prices but by the quiet erosion of the rupee. A family planning a Christmas break overseas recalibrates its budget. A group of friends postpones a New Year's trip to Paris. The arithmetic feels familiar and faintly dispiriting. The weakening currency has become an invisible tax on aspiration, prompting questions about how much further the rupee might slide and how soon the central bank might step in.

Beneath the small anxieties of holiday planning lies a larger shift in sentiment. Until recently, the Reserve Bank of India appeared determined to hold the line against a stronger dollar, drawing down nearly $25 billion in reserves to curb the upside in dollar/rupee. The rupee’s slip has travelled quickly from Bloomberg terminals to households, helped along by the perception that the Reserve Bank of India has abandoned its long-standing defence of the upper bound of dollar/rupee and is now ushering the currency lower with unusual urgency.

A move that might once have been explained as market adjustment now carries the undertone of policy intent.

Calendar 2025 did not begin in turbulence. Dollar/Rupee opened at 85.50 and traded with a measured upward bias, taking nearly ten weeks to move each rupee. Then, almost abruptly, the glide turned into a slide. The journey from 89.00 to 90.00 happened in barely two weeks, stirring the impression that the authorities were no longer resisting the Rupee’s drift but shepherding it. For a country posting strong growth and soft inflation, a deliberately weaker currency did not seem an obvious choice. The puzzle deepened because the macro signals were steady, even benign.

Much of the present unease arises from an enduring tension between theory and Indian practice. Economic models place the exchange rate at the centre of consumption, production, and trade decisions. Yet the public and corporate instinct in India has long been to treat depreciation as a manageable irritant rather than as a shift in relative prices with meaningful real-economy consequences. In reality, currency moves shape everything from exporters’ margins to households’ purchasing power. They influence investment and sentiment, even when the headline data look reassuring.

Silent Signals
The architecture of India’s exchange rate regime adds another layer of complexity. In theory, a flexible system lets markets decide. In practice, central banks intervene when market outcomes appear misaligned with economic fundamentals or when volatility threatens to destabilise balance sheets. Over decades, India has evolved an unspoken rhythm of currency management, allowing gradual depreciation while smoothing abrupt movements. This pattern has been familiar to traders, corporates, and policymakers alike.

What unsettles markets now is not the presence of intervention but the departure from the familiar rhythm. Central banks seldom shift gears without communicating the rationale. When behaviour changes while communication remains muted, markets fill the silence with conjecture. The recent divergence between established practice and observable action has created such a vacuum.

Transparency, once considered a liability for central banks, has become integral to policy effectiveness. Markets move more efficiently when they understand the framework and objectives that guide decision-making. Clear signalling anchors expectations, reducing unnecessary volatility. In India’s case, the absence of explicit articulation has led to competing interpretations. Some suspect the RBI is pre-empting future easing. Others believe it is responding to shifts in global liquidity. A few see it as a tactical adjustment to external threats, particularly the sharper edges of US tariff policy.

This uncertainty bleeds into corporate decisions as exporters and importers depend on predictable currency dynamics to price contracts, hedge exposures, and plan production. Sudden shifts in slope, even when modest, complicate planning. Firms with thin margins or long production cycles feel the tremors quickly. A currency that weakens steadily may be manageable. One that accelerates without explanation forces companies to build in risk premia, often at the expense of competitiveness.

The backdrop to all this is a global environment in which exchange rates have become barometers of policy intent as much as of economic fundamentals. Markets scrutinise central bank behaviour for subtle cues. Silence can be read as a strategy. Ambiguity can harden into narrative. That appears to be happening now, with the rupee trading less on data and more on inferred intent.

Market Undercurrents
Modern exchange rate theory suggests that currencies should track macroeconomic aggregates with reasonable fidelity. Output, consumption, productivity, and risk premia shape the real exchange rate, anchoring expectations in equilibrium dynamics. The current drift of the rupee, however, sits awkwardly against this backdrop. Growth has been strong. Inflation has remained subdued. Corporate leverage is lower than in previous cycles. Banks are well capitalised. None of these signals points to the weakness implied by recent currency behaviour.

One explanation gaining traction is the narrowing interest rate differential between India and the United States. Traders speculate that India may cut rates more aggressively in the months ahead, closing the gap with US yields. Under textbook uncovered interest rate parity, a currency with higher yields should depreciate against one with lower yields. Yet real-world evidence has always been stubbornly inconsistent with this neat logic. Risk premia, investor appetite, and global volatility often matter more than the differential itself. The correlation between policy rates and exchange-rate outcomes is notoriously weak.

Another variable shaping the narrative is the trade deficit, which widened sharply to $41.68 billion in October. Policymakers sometimes allow marginal depreciation to temper import demand in such situations. The surge in gold imports, which reached $14.72 billion in the same month, has been a particular point of concern. India accounts for a disproportionate share of global gold demand despite representing only a small fraction of global GDP. This demand, shaped by cultural preferences and hedging instincts, weighs heavily on financial savings. When gold imports rise sharply, the external account becomes more vulnerable, and currency pressures intensify.

Yet depreciation does not operate with surgical precision. The pass-through from weaker currency to higher import prices is often incomplete. Studies across economies have shown that a 1% change in the exchange rate seldom translates into a 1% rise in import costs. Global supply chains, pricing power, and hedging practices dilute the impact. For some categories, such as electronics and intermediate goods, the effect is even more muted.

This weak pass-through complicates the argument that depreciation is being used primarily to discipline imports. If import compression is the goal, currency adjustment is a blunt instrument. It may restrain sentiment, but its effect on volumes is uneven and uncertain.

Tariff Crosswinds
The geopolitical backdrop has added fresh layers of uncertainty. The US’ recent tariff actions have introduced friction into global trade flows, and countries exposed to these shifts often resort to currency adjustment as a defensive tool. When tariffs erode competitiveness abruptly, a weaker currency can partially restore it. This dynamic operates quickly, unlike tariff renegotiations or subsidy frameworks, which take time and political capital.

This raises the question of whether India’s recent depreciation reflects an unspoken response to tariff risk. The distinction between depreciation and devaluation becomes relevant here. Depreciation is organic, shaped by market forces. Devaluation is deliberate, used in fixed or semi-fixed regimes. India does not operate a fixed system, yet markets are sensitive to speed. Rapid depreciation can mimic the optics of devaluation even when the regime remains formally flexible.

Such adjustments carry trade-offs. A weaker currency benefits exporters in the short run but reduces the purchasing power of households, increases the rupee cost of foreign obligations, and can erode the appeal of local financial assets. If viewed as a sign of economic weakness, depreciation can dampen foreign investor confidence, particularly at a time when risk appetite is already fragile.

Historical experience provides both reassurance and caution. The sharp devaluations of the Russian rouble in 1998 and the Brazilian real in 1999 eventually aided their recoveries because their currencies had been severely overvalued. In contrast, the Dutch guilder’s revaluation in the 1960s, despite an economy already showing signs of imbalance, contributed to the classic Dutch disease narrative. The lesson is that outcomes depend on whether a currency is misaligned when the adjustment occurs. Adjusting an overvalued currency can restore equilibrium. Weakening a fairly valued currency can compound vulnerabilities.

Debt Cushion
A critical difference between the present moment and earlier depreciation cycles is the condition of corporate balance sheets. India’s private sector has reduced leverage significantly over the past few years. External commercial borrowings that were once heavily unhedged have become more prudently managed. The share of unhedged ECBs has fallen from about 45% two years ago to 26.1% in March 2025. This represents a meaningful buffer.

Lower unhedged exposure reduces systemic vulnerability when the currency weakens. It also provides policymakers with more room to manoeuvre, knowing that corporate repayment burdens will not rise catastrophically if the Dollar/rupee adjusts. Companies exposed to US tariffs, already contending with slimmer margins, do face higher servicing costs as the rupee weakens. Yet the incremental burden remains manageable at the aggregate level.

This relative comfort, however, should not breed complacency. Hedging practices remain uneven across sectors. Smaller firms often lack access to sophisticated instruments. Households, though not directly exposed to foreign currency debt, experience stress through education expenses, travel costs, and the inflationary impact of imported goods. A prolonged weakening cycle could also influence inflation expectations, even if headline inflation remains stable.

Suffer in Silence
The most potent force shaping the rupee’s trajectory now appears to be expectations. In floating regimes, currencies often behave like asset prices, responding less to present fundamentals and more to anticipated shifts. Once markets form a belief about policy preference, that belief can take on a momentum of its own. Traders position ahead of expected moves. Companies hedge differently. Households alter spending on foreign goods or services. These behavioural adjustments can amplify the very trend that prompted them.

This phenomenon is evident when communication is sparse. Silence becomes a signal. Markets begin to infer policy intent from patterns rather than statements. If markets believe that the authorities prefer a weaker rupee, the path to 90.00 and if not beyond  becomes smoother. If they suspect policymakers want to build buffers against external shocks or create space for monetary easing, they act accordingly.

Japan’s experience offers a cautionary counterpoint. Prolonged currency weakness under ultra-easy monetary policy did not meaningfully revive growth. Instead, it entrenched deflationary behaviour and eroded the discipline of structural reform. The broader lesson is that exchange rate policy cannot substitute for productivity gains or institutional improvements.

For India, the present moment requires careful calibration. The economy remains fundamentally healthy. Growth has held firm. Inflation has softened. Corporate balance sheets are sturdier. These conditions should, in theory, anchor the currency closer to its macroeconomic equilibrium. The wider the gap between fundamentals and the actual exchange rate, the greater the risk that expectations, rather than data, will drive the currency.

Navigating Clarity
The rupee’s recent journey underscores a central truth about modern exchange rate management. Currencies are not simply reflections of economic fundamentals. They are also mirrors of policy signalling, global crosswinds, behavioural biases, and market narratives. Policymakers must therefore navigate not only the macroeconomic environment but also the interpretative frameworks through which markets read their actions.

Clear communication can narrow the gap between perception and intent. It can reassure corporates, stabilise hedging frameworks, and temper speculative behaviour. It can also safeguard credibility, a valuable resource in periods of global uncertainty. The challenge is to provide clarity without boxing policy into rigid commitments. Floating regimes require flexibility, but flexibility without guidance can morph into ambiguity.

For now, the rupee trades in the space between these tensions. The fundamentals remain strong, yet the currency has weakened in ways that invite explanation. Markets are searching for coherence, for signals that clarify whether the adjustment is tactical, transient, or part of a broader strategic framework. Until such clarity emerges, the rupee will continue to reflect not just the state of the economy but the shifting layer of expectations that surround it. It will remain, for the moment, a story written as much in sentiment as in statistics.