The RBI Can Defend the Rupee, but Only the Government Can Strengthen It

The Reserve Bank of India has succeeded in buying time for the rupee. The larger question is whether the rest of the economic policy establishment is using that time to address the structural factors that increasingly determine a currency's long-term strength.

Over the past two months, India has mobilised nearly $49 billion through FCNR(B) deposits, external commercial borrowings and investments in government securities. Foreign exchange reserves remain close to $700 billion, among the largest reserve cushions in the emerging world. The RBI has intervened actively in both the spot and forward markets to moderate volatility. Yet the rupee continues to trade around 96 to the dollar, barely stronger than before these extraordinary measures were announced.

The mechanics are well understood. FCNR(B) deposits are largely swapped with the RBI rather than released into the spot market. Spot intervention, forward operations and banks' hedging requirements have absorbed much of the additional liquidity. These factors explain why the rupee has not appreciated. They do not explain why an economy with substantial reserves, healthy macroeconomic fundamentals and the demonstrated ability to mobilise exceptional foreign exchange increasingly requires extraordinary measures merely to maintain currency stability.

That question deserves greater attention because it suggests that India's exchange-rate challenge is changing in character.

From Stability to Competitiveness
The experience of the 2013 taper tantrum provides an instructive contrast. It is often remembered primarily for the FCNR(B) mobilisation scheme. That understates what was actually achieved. FCNR(B) was one instrument within a broader sovereign strategy in which the government and the RBI acted in concert to restore confidence through fiscal credibility, strengthened external financing, prudent liquidity management and coherent communication. Markets responded not to one policy measure but to the credibility of the overall framework.

That lesson remains valid today. What has changed is the nature of the challenge.

In 2013, policymakers had to restore confidence in India's macroeconomic stability. Today, India's macroeconomic position is considerably stronger. Inflation is better anchored, banks are better capitalised, foreign exchange reserves are substantially larger, and the current account deficit is far more manageable than during the taper tantrum. Yet the rupee continues to face persistent downward pressure.

Currencies are forward-looking indicators. They reflect not merely today's stock of reserves but the market's assessment of an economy's future capacity to earn foreign exchange. Persistent pressure on the rupee despite abundant reserves and repeated intervention therefore deserves to be interpreted as more than a market phenomenon. It suggests that investors are increasingly evaluating India's future competitiveness: its productivity, export capability, technological preparedness, investment quality and institutional credibility.

India has spent more than three decades building resilience against external shocks. That effort has been remarkably successful. The next challenge, however, is different. It is to ensure that the economy's competitiveness evolves as rapidly as its capacity to manage external shocks. The first signs of this shift are already visible in India's external sector. They deserve much closer policy attention than they have received so far.

The Emerging Fault Lines
The first structural shift is visible in the changing nature of foreign direct investment. India rightly celebrates gross FDI because it reflects the country's attractiveness as an investment destination. From the standpoint of external sustainability, however, net FDI has become an equally important indicator. Recent balance of payments data reveal a widening divergence between the two. While gross inflows have remained robust, net FDI has declined sharply as profit repatriation, disinvestment and outward investment by Indian companies have accelerated. Attracting investment and retaining investment are no longer the same policy challenge.

A second shift is evident in India's trade account. Merchandise exports have remained resilient despite an uncertain global environment, but imports have expanded even faster, widening the merchandise trade deficit. The current account remains manageable largely because services exports and workers' remittances continue to provide a substantial cushion. That strength should not encourage complacency. An economy of India's scale cannot indefinitely depend on one component of the external account to offset persistent weaknesses in another.

The third shift is only beginning to enter the policy debate. India's software and business services exports have become the country's single largest source of invisible earnings and one of the principal anchors of external stability. Artificial intelligence will undoubtedly create new opportunities, but it will also alter the economics of several services in which India has built a comparative advantage. Exchange-rate strategy must therefore begin to treat AI not merely as a technology issue but as an external-sector issue that will influence India's future capacity to earn foreign exchange.

Taken together, these developments point to a distinction that deserves greater attention. India has become increasingly successful in mobilising financial resources whenever external conditions become adverse. FCNR(B) deposits, portfolio investment and other capital inflows provide valuable liquidity and help maintain orderly market conditions. Long-term currency strength, however, depends on something more durable: the willingness of investors to establish productive capacity, deepen supply chains, undertake research, retain earnings and integrate India more deeply into global value chains. The former finances the balance of payments. The latter strengthens it by expanding the economy's future capacity to earn foreign exchange. The first buys time; the second changes the trajectory.

Measuring What Matters
This distinction has important implications for public policy. For decades, external resilience has been judged largely through foreign exchange reserves, the current account deficit and exchange-rate stability. Those indicators remain necessary, but they are no longer sufficient. The policy dashboard must now include retained FDI, export sophistication, logistics efficiency, technological capability, participation in global value chains and the resilience of India's services exports in the age of artificial intelligence.

The uncomfortable truth is that every extraordinary intervention by the RBI should be viewed not merely as a policy success but also as a policy signal. It should prompt a larger question: what structural weakness is the central bank being required to compensate for? Unless that question is addressed, successive interventions will buy stability without necessarily strengthening the foundations on which long-term currency confidence rests.

From Currency Defence to Competitiveness
The RBI has repeatedly demonstrated that it possesses the institutional credibility, operational capability and policy instruments required to maintain orderly foreign exchange markets. No central bank, however effective, can permanently offset structural weaknesses in competitiveness. Those are shaped by the cumulative effect of decisions on trade, taxation, logistics, industrial policy, technology, skills and the overall investment climate.

The debate on the rupee has therefore reached an inflection point. The question is no longer whether the RBI should intervene more actively, but whether India's broader economic policy framework is evolving quickly enough to sustain confidence in the economy's future earning capacity. Monetary policy can buy time. Competitiveness determines whether that time is used well.

The next generation of exchange-rate management will be judged less by how effectively India defends the rupee than by how successfully it builds an economy that no longer requires extraordinary measures to sustain confidence in it. That responsibility extends well beyond the RBI. It belongs to the entire economic policy establishment.