Taking Stock of the Rupee in an Uncertain World

Where does the Indian rupee stand amid sharply divergent assessments of its recent movements? 

First, the doomsday view may perhaps need to smell the coffee. It is necessary to consider the facts before turning oracular. Exchange rates are prone to noisy, idiosyncratic behaviour, replete with overshoots, short-lived spikes on either side, and irrational expectations, as markets try to front-run developments around them.

A realistic and informed assessment of the exchange rate, therefore, needs to evaluate it over a reasonable period of time, not at every opportunistic point in time, which provides fodder for sensational headlines. Underlying the 90-100 curtains call that measures depreciation over points of time, the reality is that during the financial year 2025-26 on an annual average basis, the rupee has depreciated by 4.3% from its annual average level a year ago.  

How does this compare with the history of its movements?

Over a 20-year period from 2007-08 to 2025-26, the rupee depreciated on average by 3.2%. Over a 10-year period from 2016-17 to 2025-26, the rupee depreciated by 2.9%. Over the last five years from 2021-22 to 2025-26, the rupee depreciated by 3.4%. The rupee’s depreciation during 2025-26 is in this ballpark range.

Moreover, even if a briefer period of time is considered for the assessment, say from February 27 or the day just before the US and Israel launched Operation Epic Fury against Iran, to March 30 or the closing day of onshore trading of the rupee for the financial year 2025-26, it can be observed that the rupee’s depreciation at 3.9% almost mirrored the US dollar’s appreciation by 3% which took down all currencies. To paraphrase Shakespeare from Julius Caesar, the fault, dear Brutus, lies not in us but in the US dollar! 

It would do well, therefore, not to mimic Chicken Little, the 2005 American animated science fiction comedy film produced by Walt Disney, to claim that the sky is falling, only to be ridiculed by the whole town.

The world is awash in giant tides of extreme uncertainty. There is a pervasive anxiety that with a shock and awe vision of foreign policy, brawny interventionism with a stress on business and oil, and focus on spectacular wins, humanity is being swept into an age of war. A fragile resilience and hedging against risks were the hallmarks of the global economy during the year gone by, as reflected in the IMF’s January 2026 World Economic Outlook update. 

Accommodative monetary and fiscal policies, buoyant stock markets (except in India) and AI euphoria offset high uncertainty not seen since the end of the Cold War, and tariffs with multiple feints and tactical retreats. 

Abrasive geopolitics threatens to upend all that, especially with the global hegemon’s ‘Donroe Doctrine’ becoming the “my way” agent provocateur and the main source of uncertainty. Each country is bracing up to face the worst in this spillover-swept global landscape. Neo-mercantilism with muscular industrial and trade policies; the reshaping of supply chains with risk first, not cost first; the slow disintegration of world trade into regionalism; multilateralism giving way to pluralism of convenience; and the complete undermining of financial and governance institutional architecture are all making the world a smaller and more dangerous place to be in than just a few years ago.

Pessimism has become widespread and persistent, and the global economy’s biggest constraint. Gold and silver have become the new fear gauges. It could be a crisis of confidence that is muting investment worldwide, raising the option value of waiting. It could also be the reason why fiscal discipline is being weakened.

Surfer’s Handbook
In this turbulent and uncertain world, how should India position itself? There is wisdom in perhaps taking a leaf out of a surfer’s handbook. When the sea is rough and the waves are tall and breaking, it is better to dive underneath the turbulence rather than trying to go over it. This allows the surfer to pass through the wave with less effort, conserve energy and avoid being pushed to the bottom of the sea.

To begin, financial prices need to adjust downwards to weather the gathering storm. For India, equities and bonds have adjusted; forward price-earnings multiples have reverted close to historical averages; corporate earnings corrections are bottoming out and steadying; and credit markets are slackening. 

The RBI has quietly put its shoulder to the wheel. Taking advantage of the rare negative inflation differential with major trading partners, the RBI has enabled a real effective depreciation of the rupee by over 7%, almost a tenth of which has accrued from the negative inflation differential. Given the size of its current account deficit and its net foreign assets position, this order of real depreciation appears apposite.

These price corrections will insulate India’s solid fundamentals. With incoming data, it is becoming increasingly clear that there is a post-pandemic upshift towards an 8% growth trajectory from 7% during 2002-19, on the back of stronger policy frameworks, resilient fundamentals and still ample buffers.

Unlike in deflationary China, domestic demand remains the mainstay of India’s growth. The genie of inflation is back in the bottle, even with food prices emerging out of deflation. Financial and corporate sector balance sheets are stronger than ever before. The public sector’s balance sheet is slowly mending, unlike in the rest of the world. The external sector is well-buffered, and payment pressures are modest.

In the final analysis, these fundamentals will determine the value of the rupee. Stability has been its leit motif, and this speaks for the nimble deftness of exchange rate management.

The RBI has a big stake in the stability of the rupee from the point of view of preserving sovereign financial stability. It must never back down from that calling, using all instruments at its command and in every shore where the rupee trades.

After all, it is the RBI that has to deal with the impossible trinity of fixed exchange rates, open capital account and independent monetary policy. The trinity is impossible when one seeks corner solutions. The RBI solves the trilemma by going for intermediate solutions: managed float; calibrated capital account liberalisation; and independent monetary policy focused on domestic objectives, while the stability of the exchange rate is assigned to foreign exchange interventions.

It must not flinch from expressing itself. Through its policy stance, information dissemination and market operations, the RBI informs the market about its view on the rupee. Market participants may do well to heed its voice for what it represents, backed as it is by formidable capacity and resolve to buffer the resilience of the Indian economy, as it navigates an unclear and unstable path into the future. 

 

This article is the concluding part of the six-part series on exchange-rate policy and financial stability by Dr Michael Debabrata Patra.

Part I set out the competing narratives on the rupee and the case for exchange-rate stability. Click here.
Part II examined why floating exchange rates have often amplified crises in emerging economies. Click here.
Part III examined how volatile capital flows, rather than trade fundamentals, now dominate currency movements and shape central bank behaviour. Click here.
Part IV set out a proposal for strengthening the RBI’s foreign exchange intervention toolkit and reserve strategy. Click here.
Part V assessed why the IMF’s evolving surveillance and labelling practices risk undermining exchange-rate stability rather than preserving it. Click here.