{"id":104491,"date":"2026-05-22T11:31:21","date_gmt":"2026-05-22T06:01:21","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=104491"},"modified":"2026-05-22T11:31:21","modified_gmt":"2026-05-22T06:01:21","slug":"rupee-depreciation-rbi-intervention-and-indias-external-sector-challenges","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/rupee-depreciation-rbi-intervention-and-indias-external-sector-challenges\/","title":{"rendered":"Rupee Depreciation, RBI Intervention and India\u2019s External Sector Challenges"},"content":{"rendered":"<h2 style=\"text-align: justify;\"><b>Rupee Depreciation Latest News<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Indian rupee has witnessed a sharp depreciation, sliding close to <\/span><b>\u20b997 per US dollar<\/b><span style=\"font-weight: 400;\"> amid rising oil prices, geopolitical tensions in West Asia, foreign capital outflows, and global financial uncertainty.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The debate has intensified over whether the Reserve Bank of India should actively intervene or allow the rupee to \u201cfind its market level\u201d.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Why is the Rupee Falling?<\/b><\/h2>\n<ul>\n<li><b>Pressure from the capital account:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Contrary to conventional explanations, the recent depreciation is not primarily due to weak macroeconomic fundamentals.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">India continues to record relatively <\/span><b>strong GDP growth,<\/b><span style=\"font-weight: 400;\"> manageable inflation, and fiscal consolidation.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">The core issue lies in the capital account:<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">Persistent Foreign Institutional Investor (<\/span><b>FII<\/b><span style=\"font-weight: 400;\">) outflows since mid-2025.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Negative net Foreign Direct Investment (<\/span><b>FDI<\/b><span style=\"font-weight: 400;\">) inflows during several months.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Rising <\/span><b>US interest rates<\/b><span style=\"font-weight: 400;\"> making dollar assets more attractive.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Heightened global risk aversion due to the West Asia crisis.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><span style=\"font-weight: 400;\">This has reduced dollar inflows into India while increasing demand for foreign currency.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Role of balance of payments (BoP):<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">India traditionally runs a <strong><a href=\"https:\/\/vajiramandravi.com\/current-affairs\/current-account-deficit\/\" target=\"_blank\">Current Account Deficit<\/a><\/strong> (<\/span><b>CAD<\/b><span style=\"font-weight: 400;\">) because imports exceed exports.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">This is usually financed through the FDI, portfolio investments, remittances, and external borrowing.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">When capital inflows exceed the CAD, the BoP remains in surplus and supports the rupee.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">However,<\/span>\n<ul>\n<li><span style=\"font-weight: 400;\">2023-24 saw a large BoP surplus, allowing RBI to accumulate reserves.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">2024-25 moved back into deficit.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Capital outflows in 2025-26 intensified depreciation pressures.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><span style=\"font-weight: 400;\">Thus, the rupee <\/span><b>weakened <\/b><span style=\"font-weight: 400;\">despite <\/span><b>stable <\/b><span style=\"font-weight: 400;\">domestic <\/span><b>fundamentals<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Debate on RBI Intervention<\/b><\/h2>\n<ul>\n<li><b>Argument for a market-determined rupee:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Economists argue that excessive intervention distorts markets.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">A weaker rupee theoretically discourages imports, boosts exports, and <\/span><b>restores <\/b><span style=\"font-weight: 400;\">external balance <\/span><b>naturally<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">They caution that defending a currency level can deplete forex reserves, delay necessary adjustments, and create future instability.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Argument for RBI intervention:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Some economists argue that uncontrolled depreciation, especially when driven by speculative finance rather than fundamentals, can become dangerous.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><b>Risks of unchecked depreciation:<\/b>\n<ul>\n<li><b>Imported inflation<\/b><span style=\"font-weight: 400;\">, especially through crude oil.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Higher production costs due to import dependence.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Rising inflation expectations.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Panic-driven capital flight.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Adverse investor sentiment.<\/span><\/li>\n<\/ul>\n<\/li>\n<li><span style=\"font-weight: 400;\">The RBI therefore intervenes not to target a fixed exchange rate, but to prevent \u201cexcessive and disruptive volatility.\u201d<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Did Artificial Stabilisation Backfire?<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A major policy debate concerns RBI actions during 2023-24, when the rupee was held largely within the \u20b981-83 range.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">RBI sold or bought dollars aggressively to smooth movements. Critics argue this created an \u201c<\/span><b>artificial plateau<\/b><span style=\"font-weight: 400;\">\u201d.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">As global pressures intensified later, the rupee saw a sharper fall because the depreciation that had been delayed earlier was eventually reflected quickly in the exchange rate.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Exchange Rate Dynamics and Market Psychology<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Exchange rates are heavily influenced by <\/span><b>sentiment<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">If investors expect further depreciation foreign investors withdraw funds, exporters delay dollar conversions, importers rush to buy dollars, and speculators intensify pressure.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This creates a <\/span><b>vicious cycle<\/b><span style=\"font-weight: 400;\"> where expectations themselves accelerate depreciation.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Economists explained such \u201c<\/span><b>overshooting<\/b><span style=\"font-weight: 400;\">\u201d behaviour, where currencies move beyond equilibrium values in the short run.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Why Does Depreciation May Not Boost Exports Much?<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The <\/span><b>textbook assumption<\/b><span style=\"font-weight: 400;\"> that a weak currency automatically boosts exports is limited in India\u2019s case because:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Indian exports are highly <\/span><b>import-intensive<\/b><span style=\"font-weight: 400;\">.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Inputs such as crude oil, intermediate goods, and machinery become costlier.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><b>Inflation <\/b><span style=\"font-weight: 400;\">erodes competitiveness gains.<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Moreover, if many emerging market currencies weaken simultaneously against the dollar, relative export competitiveness changes little.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Thus, depreciation imposes immediate costs on households and firms without guaranteeing export gains.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>RBI\u2019s Policy Approach<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The RBI maintains that exchange rates should remain market-determined, intervention is only to <\/span><b>smooth volatility<\/b><span style=\"font-weight: 400;\">, and no fixed exchange rate target exists.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India still possesses substantial forex reserves, credible monetary institutions, and relatively stable macroeconomic indicators.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The IMF\u2019s Integrated Policy Framework (<\/span><b>IPF<\/b><span style=\"font-weight: 400;\">) also recognises forex intervention as a legitimate tool for emerging market economies during periods of excessive volatility.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Way Forward for India<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Allow<\/b><span style=\"font-weight: 400;\">: Gradual market-driven adjustment while preventing speculative volatility.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Strengthen<\/b><span style=\"font-weight: 400;\">: Long-term capital inflows through manufacturing and technology reforms (globally attractive AI and advanced-tech investment opportunities).<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Reduce<\/b><span style=\"font-weight: 400;\">: Import dependence, particularly in energy and critical intermediates.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Expand<\/b><span style=\"font-weight: 400;\">: Export diversification and competitiveness under initiatives like \u201cMake in India\u201d.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Deepen<\/b><span style=\"font-weight: 400;\">: Domestic financial markets to reduce vulnerability to external shocks.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Maintain<\/b><span style=\"font-weight: 400;\">: Adequate forex reserves as a buffer against global uncertainty.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Conclusion<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India should avoid both extremes \u2014 neither rigidly defending the rupee nor allowing disorderly depreciation. A <\/span><b>calibrated strategy<\/b><span style=\"font-weight: 400;\"> is essential.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Ultimately, exchange-rate stability cannot rest solely on RBI intervention. Sustainable rupee strength will depend on improving India\u2019s structural competitiveness, external resilience, and investor confidence in the long run.<\/span><\/li>\n<\/ul>\n<p style=\"text-align: justify;\"><b>Source: <\/b><a href=\"https:\/\/www.pressreader.com\/india\/the-hindu-bangalore-9ww1\/20260522\/282381226195373\" target=\"_blank\" rel=\"nofollow noopener\"><b>TH<\/b><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The Indian rupee has witnessed a sharp depreciation, sliding close to \u20b997 per US dollar amid rising oil prices, geopolitical tensions in West Asia, and foreign capital outflows. <\/p>\n","protected":false},"author":19,"featured_media":104516,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[4337],"class_list":{"0":"post-104491","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"tag-rupee-depreciation","9":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/104491","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/19"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=104491"}],"version-history":[{"count":4,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/104491\/revisions"}],"predecessor-version":[{"id":104519,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/104491\/revisions\/104519"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/104516"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=104491"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=104491"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=104491"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}