The Indian rupee weakened to an all-time low of 84.50 against the US dollar on Thursday, driven by foreign fund outflows, escalating geopolitical tensions and expectations of sharper rate cuts by the US Federal Reserve. According to RBI data, the 40-currency basket measuring the rupee’s competitiveness shows it was overvalued by 7.21 percent through October—nearly the highest in six years.
But the rupee’s decline of 1.5 percent this year against the dollar is the least among Asian currencies. RBI Governor Shaktikanta Das recently noted that the rupee has emerged as one of the least volatile currencies in the world since the start of 2023. Given that excessive volatility can have detrimental effects, RBI’s stated policy is to ensure that the exchange rate remains stable, which in turn instils confidence among market participants, investors and the wider economy.
That said, the RBI does not have a target level for the rupee. As the central bank’s latest monthly bulletin observed, the threshold should be determined by demand and supply, and reflect India’s macroeconomic fundamentals. But there is criticism that the RBI has artificially kept the exchange rate stable through extensive interventions in the foreign exchange market.
Between June and September 2024, the central bank indirectly sold dollars, employing public sector banks as intermediaries, helping prevent a depreciation that could have disrupted trade and investments. The IMF raised an alarm on this, too. But the RBI, through an article co-authored by Deputy Governor Michael Patra, contested the decision to classify India’s exchange rate policy as a ‘stabilised arrangement’ between December 2022 and October 2023. It argued that the RBI’s forex interventions should be measured relative to the GDP, which averaged 1.6 percent during February to October 2022, as against 1.5 percent during earlier crises of smaller magnitude.
If the rupee fluctuates wildly, businesses and investors may suddenly see the value of their rupee-denominated assets decline. RBI’s strategy has been to keep the rupee within a narrow trading range, minimising risk as well as making it attractive for global transactions. The currency can come under sudden pressure if there is no safeguard. So India’s forex accumulation and interventions appear appropriate. While the prevailing exchange rate policy has not hurt India’s trade competitiveness, artificially controlling the rupee’s stability may not be sustainable in the long run.