Policymakers Aren't Losing Sleep Yet, But Rupee May Force A Wake-Up Call
Indian policymakers seem relaxed as the rupee weakens past 90, but a falling currency in a strong economy hints deeper trouble ahead.
The Gist
The depreciation of the Indian rupee to 90 against the dollar has significant implications for the textile trade and exports.
- Exporters can adjust pricing strategies to maintain competitiveness in high-tariff markets.
- The Reserve Bank of India's shift towards allowing market forces to determine currency management could signal a new approach to currency management.
- Despite strong domestic economic indicators, the rupee's weakness raises concerns about foreign investment and India's global economic standing.
Consider the arithmetic of the textile trade. When the rupee was at 80 to the dollar, a $2 T-shirt yielded Rs 160. With the currency depreciating to Rs 90, that same exporter can competitively price their product at $1.75 to hold market share or, alternatively, maintain the price point to earn Rs 20 more.
In the real world, that may not happen as input costs might fluctuate.
But not that much.
A depreciating rupee will act as a shock absorber to Indian exports to high-tariff countries like the United States, particularly against other exporting countries that face lower tariffs.
It is no surprise, then, that export-heavy IT and pharmaceutical stocks rallied on Wednesday as the currency breached the psychological 90 mark.
RBI’s New Strategy?
This movement signals a distinct strategic pivot in New Delhi’s currency management.
Under the previous Governor at India’s central bank, Reserve Bank of India (RBI), the mandate was stability at all costs — a tightly managed float that earned the rupee a reputation for resilience but drew attention from the International Monetary Fund for excessive intervention.
That era appears to be over.
With no resolution to geopolitical trade barriers in sight, the RBI is evidently allowing market forces to take the wheel.
"It will come back next year," India’s Chief Economic Advisor V Anantha Nageswaran remarked on Wednesday. "Right now, it's not hurting our exports or inflation. I am not losing my sleep over it. If it has to depreciate, now probably is the right time."
Weak Rupee, Weaker NervesWhile some observers attribute the slide to speculators, blaming speculators is a tricky stance to take in free markets, particularly since it works in both directions.
In this case, the market is betting against an imminent US-India bilateral trade deal.
Despite a US trade delegation visiting next week, a breakthrough seems unlikely, overshadowed by the presence of Russian President Vladimir Putin in New Delhi.
The Kremlin has explicitly stated that Russian oil exports to India will resume soon. This is a bone of contention with Washington.
Half of the 50% tariff imposed on Indian exports is a punitive measure specifically targeting India’s purchase of Russian crude, which the US views as funding the war in Ukraine. Although Indian refiners had paused direct purchases, reports suggest Russian oil continues to flow via mid-sea transfers.
While exporters may cheer a weaker currency, the rupee at 90 is a hard sell domestically. It raises the cost of overseas education, travel, and outward investment.
Crucially, it increases the import bill for the world's third-largest oil consumer. Though, with crude prices hovering near $63 a barrel, the inflationary impact remains muted for now.
The real story, however, is not about the price of oil, but the price of confidence.
Rupee Truth Test
There is a disconnect in the current data.
India boasts strong macroeconomic fundamentals such as low inflation, moderate interest rates, and an impressive 8.2% GDP growth rate in the latest quarter driven by robust domestic consumption.
However, the rupee’s weakness exposes the vulnerability on the external front: a slowdown in Foreign Direct Investment (FDI) and portfolio flows. Even dollar-spending tourists, despite their growing wanderlust globally, aren’t coming to India in meaningful numbers, leaving inbound arrivals only near pre-pandemic levels rather than truly recovering.
It begs the question: which metric truly gauges the health of the Indian economy? Is it the BSE Sensex and NSE Nifty hitting all-time highs, or the currency sliding to historic lows?
While the domestic story is strong, honest self-reflection suggests the rupee is the more accurate barometer of India’s global standing.
The depreciation reflects diminished interest from global fund managers, who may also be currently distracted by the AI-fueled equity frenzy in Western markets.
Whether this lack of inflow is a matter of faulty perception or fundamental reality is irrelevant; the market pricing is unambiguous.
Policymakers may not be losing sleep over the rupee today, but if the trend reflects a deeper structural disengagement by global investors, they may soon have to.
