Last week, India and Indians got a happy surprise. India’s GDP grew by 8.2 percent in the second quarter—way higher than all estimates. This week, Indians bore the brunt of a nasty surprise. The rupee hit 90.28 per dollar, crossing a milestone and into a psychological zone. The strange cohabitation of rising growth and falling currency highlights the faultlines and one of many paradoxes flickering in the political economy.
Consider the journey of the rupee. It began the year at 85.80, and by December, it had depreciated by around 5 percent. Imagine estimating the fall and cost of hedging against it. What is noteworthy is that in these 12 months the dollar index DXY yo-yoed up and down, from 109 to 96 and 99. The rupee went down with the dollar and continued sliding even when the dollar recovered. Unsurprisingly, the rupee has got tagged as the worst-performing currency in Asia.
One would think that the rupee’s depreciation would merit attention, but it didn’t find mention in Friday’s monetary policy statement. It would seem it was par for the course. At the presser, Governor Sanjay Malhotra said the RBI will intervene to curb volatility and doesn’t have a target level for the rupee. Arguably, there is not much the RBI on its own can do—it has intervened in recent weeks, but clearly there are limitations to using the $686-billion war chest.
The rupee’s fall is triggered only partly by mood mechanics and is mostly affected by moolah mathematics. The establishment has come to believe that the rupee’s slide is caused by Trump’s tariff tantrums and the stalled trade deal. While India is negotiating a trade deal, Trump seems to be negotiating a geopolitical deal. It is true high tariffs and uncertainty have affected sentiments. That said, it cannot be an alibi for a falling currency. Mexico is yet to get a deal and the peso is strengthening; the yuan has appreciated although the US-China deal is yet to fructify.
The immediate cause of the rupee’s fall is essentially about supply and demand. India’s dollar needs and dollar income are scaffolded by overseas remittances, and foreign direct and institutional investment flows. India is the fastest growing large economy, ranked fourth on GDP. Yet, India has struggled to woo FDI. India punches way below its stature and is ranked 15th by UNCTAD on investments. It is yet to cross the $100-billion mark; the gross FDI is at $50.3 billion and net FDI barely $7 billion.
Money chases safety and returns. India grew at 6.5 percent in 2024-25 and is averaging above 7 percent this year. India has stable macros and has lived up to its word on deficits. Inflation is within the target band. Corporate results have been good. It has a billion-plus consumption base. India’s stock indices are hovering at record highs, but foreign portfolio investors have pulled about $18 billion out of the market.
Strangely, a choir of policy makers and economists seem to welcome the rupee’s fall. It could be argued that the slide was unavoidable, but the whoopies defy logic given the construct of the economy. India imports more than it exports. It imports 88 percent of its crude oil, 26 million tonnes of liquefied gas, around 240 MT of coal, 7 MT of pulses, plus electronics, gold, and intermediates for the domestic market and exports. The thesis that a cheaper rupee equals higher exports is fallible. A costlier dollar will only hurt in an economy that depends on import of intermediate goods—gold, gems, petroleum, textiles, chips, electronics, and pharma ingredients.
The value of the rupee rests on the robustness of growth. Economic growth can be propelled with public spending and private consumption. India has banked on public infrastructure to boost growth. This year, as the infra story took a pause, India tweaked income tax and GST rates to push private consumption. Ideally, sustainable growth calls for a balance of both public and private consumption. This calls for enabling the virtuous cycle—investment to jobs to income to consumption to demand to investment. India is in a ‘Goldilocks’ spot, but the private sector is shying away from big-tag investment and seems to prefer sitting on cash. There are visible and invisible causes for this hesitancy.
An economy aspiring to a $10-trillion GDP must address the issues haunting entrepreneurs and clear the parade of paradoxes. Consider the construct of a gross domestic economy. Three decades after liberalisation, agriculture hosts nearly half the workforce and manufacturing is yet to touch 20 percent of GDP. Between 2019 and 2024, exports have barely nudged ahead from 19.8 percent to 21.2 percent of GDP. It is well established that it is the small and medium enterprises that catalyse export growth. But MSMEs struggle with regulatory overhang and poor access to affordable credit.
Among the paradoxes, the most perplexing is the cost of money. This week, the RBI cut interest rates by 0.25 percentage points, taking the interest rate to 5.25 percent. The question is, at what rate is credit available to different risk groups. While the RBI has slashed rates by 1.25 percentage points over the past year, the weighted average lending rate of banks has dipped by barely 0.70 percentage points for fresh rupee loans. Effectively, this means lending rates for AAA corps hover near 8 percent and that for medium enterprises is in double-digits.
Trumponomics is a well-timed lesson on the consequences of unattended causes. The question that begs to be asked is what is India’s leverage? What can India produce that the world cannot do without?
Read all columns by Shankkar Aiyar
SHANKKAR AIYAR
Author of The Gated Republic, Aadhaar: A Biometric History of India’s 12 Digit
Revolution, and Accidental India
(shankkar.aiyar@gmail.com)