The Indian Rupee has seen a sharp decline against the US Dollar over the past year. The exchange rate has reached worrying levels, sparking debates in political and economic circles. Many public figures, including politicians and celebrities, have voiced concerns, making it a key electoral issue. However, the perception of a weak Rupee is misleading. Currency value is relative, primarily measured against the Dollar, which dominates global trade. The Rupee’s depreciation is due to rising demand for the Dollar rather than a direct fall in its value.
Between 2021 and 2022, the Rupee dropped from 72 to 82 and crossed 83 in October 2022. Finance Minister Nirmala Sitharaman stated that the focus should be on the strengthening Dollar rather than a weakening Rupee. This view has sparked political debates, revealing the complexities of currency valuation. The Rupee is not uniquely weak. Other currencies, including the Chinese Yuan, have also depreciated against the Dollar during this period.
Two key factors drive the Dollar’s strength. First, the US economy has performed well. Second, the Federal Reserve raised interest rates to combat inflation. These hikes slowed the US economy but attracted global investors seeking better returns. This shift in investment patterns has strengthened the Dollar, impacting currencies worldwide, including the Rupee.
Higher US interest rates have drawn foreign investors to the US market, further increasing demand for the Dollar. In 2024, foreign direct investment in the US hit record highs. As a result, investments in India’s stock market fell to their lowest level in 12 years. This shift reflects changing investor sentiment.
India’s trade deficit has also contributed to the Rupee’s decline. The country imports more than it exports, especially oil, which creates consistent demand for Dollars. While IT services bring in foreign revenue, they do not offset high import costs. Gold imports have surged due to reduced customs duties, worsening the situation.
A weaker Rupee benefits some industries. IT and pharmaceutical companies earn revenue in Dollars, increasing their profits. However, direct benefits for employees may vary. The Reserve Bank of India (RBI) has intervened in currency markets to stabilize the Rupee. It has spent billions managing the exchange rate, drawing criticism. Former Chief Economic Advisor Arvind Subramanian argues against excessive spending on stabilization.
Exchange rates can be pegged or free-floating. Before 1991, India had a pegged exchange rate, but liberalization introduced a flexible system. Since October 2021, the RBI has spent between $100 to $150 billion managing the Rupee. This level of spending is comparable to India’s oil import costs, raising concerns about sustainability.
Some economists argue the Rupee is overvalued and should depreciate further. The Real Effective Exchange Rate (REER) suggests its value is higher than necessary. Subramanian and others believe the market should determine the exchange rate instead of artificial intervention.
There are several theories about the RBI’s motivations. One suggests its interventions are unintentional. Another claims the RBI aims to control inflation, though some economists dismiss this. A third theory points to political pressure, arguing the government wants to avoid a weak Rupee. The final theory suggests the RBI is protecting Indian companies with foreign loans, as a weaker Rupee would increase their debt burden.
The article concludes by urging a shift in focus to inflation and growth rather than currency stabilization. With Sanjay Malhotra appointed as the new RBI governor, policy changes may be on the horizon. This shift could signal a reassessment of the RBI’s approach amid ongoing economic challenges.
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