India still treats a falling rupee as a national embarrassment. Each slide against the dollar brings headlines, opposition attacks and defensive statements. The recent move towards ₹95 to the dollar has familiar causes: a firm dollar, West Asia risk to oil flows, and foreign equity selling. None of these requires the Reserve Bank of India to turn a managed float into a shadow peg.
Rupee defence has gone too far
The problem is not a weaker rupee. It is the effort to avoid visible weakness for too long.
The RBI is right to prevent disorderly moves. A central bank cannot stand aside when importers, banks or offshore trades create a one-way market. But India has moved beyond smoothing. Too much of the adjustment has shifted from the exchange rate to the RBI’s spot sales, forward book and instructions to banks.
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That changes behaviour. Exporters, importers, banks and borrowers start reading the exchange rate less as a price and more as a policy promise. The rupee then stops doing part of its job. It no longer tells firms enough about inflation gaps, capital flows, oil prices or the changing strength of the dollar.
A currency need not be free-floating to be useful. But a currency held in too narrow a range gives false comfort. It compresses small adjustments and stores up larger ones.
RBI forward book and corporate hedging risk
The biggest cost of this policy may lie outside the currency market.
A stable spot rate lowers the visible cost of dollar debt. Lower forward premia make hedging look expensive. Indian companies with external commercial borrowings, foreign currency loans or offshore liabilities then delay cover. Treasury departments begin to treat the RBI’s reserves as insurance.
That is moral hazard. It does not show up in daily exchange-rate charts. It shows up when the rupee finally moves.
If oil prices rise sharply, or US rates stay high, the currency may not fall in small steps. It may move in a jump. Debt service costs will then rise at once for firms that saved on hedging costs. Banks will see the risk after the event, in credit files rather than currency screens.
This is how an exchange-rate policy meant to reduce volatility can move volatility into corporate balance sheets.
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Rupee policy and export competitiveness
The trade argument needs care. Recent REER readings do not support the old claim that the rupee is plainly overvalued. The 40-currency real effective exchange rate has moved below its long-run average.
That does not weaken the case for more flexibility. It strengthens it.
If the real exchange rate has already adjusted, RBI should not overrule the nominal rate each time oil prices, portfolio flows or the dollar change direction. Exporters need a price signal. Importers need one too. A currency defended too often delays both signals.
India wants to gain from supply chains moving out of China. That will not happen because the rupee is weak. It will happen only if logistics, tariffs, power costs, courts and state-level execution improve. But exchange-rate policy should not work against that adjustment. A developing economy cannot ask manufacturing to compete globally while shielding every importer and borrower from currency risk.
Forex reserves are a buffer, not a rate target
India’s foreign exchange reserves are large. That is a strength earned over many years. It should not become an excuse for routine defence of an implicit level.
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Reserves exist to stop panic, meet temporary dollar shortages and prevent financial-market seizure. They are not meant to fight every move caused by oil, the dollar or foreign portfolio flows. The same applies to forward intervention. A large forward book may calm today’s market, but it creates future obligations and keeps traders focused on the RBI’s next move.
The market can understand intervention against disorder. It becomes less confident when it suspects that the central bank is defending an unstated number.
Managed flexibility is better than managed calm
India also wants the rupee to be used more widely in trade settlement and wants deeper foreign participation in its bond market. That requires a liquid currency market with two-way risk. Foreign investors can live with volatility. They are less comfortable with a price that appears managed until pressure becomes too large to hide.
The old Mundell-Fleming constraint still applies. India does not have a fully open capital account, but it is opening parts of its debt market and relying more on global capital. The more it does so, the harder it becomes to combine an independent monetary policy with a tightly managed exchange rate.
The RBI cannot be inflation targeter, bond-market sponsor and currency anchor at the same time.
Mint Street should return to managed flexibility. Use reserves when markets disorderly. Do not use them to defend a preferred rupee level. Make companies hedge because volatility is visible, not because regulators lecture them after losses.
A weaker rupee is not a policy failure. A rupee kept stable until it cannot be defended is worse.
Dr Santhosh Kumar PK is Professor & Director, Centre for Budget Studies, CUSAT.