Debates over the exchange rate in India often proceed as if the price of rupee were just another financial prize best left to market correction and macroeconomic adjustment. In theory, a weakened currency serves a useful balancing function. Imports become more expensive, domestic demand adjusts, exports become more competitive and external imbalances gradually stabilize. It is a classic mechanism, elegant in its abstraction and widely accepted in orthodox macroeconomics.
But economies, especially emerging market economies, do not experience exchange rate depreciation in abstraction. They experience it through speculative attacks, fuel prices, transportation costs, electricity bills, food inflation and falling real wages.
What often gets lost in these debates is that currencies do not depreciate uniformly across society. Their effects spread unevenly across economies, between classes, sectors and regions.
India imports nearly 88.6 percent of its crude oil requirements, almost half of its natural gas consumption, significant inputs of fertilizers, edible oils, electronic components and industrial intermediates. These are not discretionary imports that households or businesses can easily reduce in response to a weaker currency. Their demand remains structurally inelastic in the short term.
This distinction is extremely important. In economies dependent on essential imports, depreciation rarely produces an immediate compression of import demand. Instead, it first increases domestic costs. Fuel prices are rising, freight is becoming more expensive, fertilizer prices are impacting agriculture, power generation is absorbing rising input costs, and food inflation is gradually escalating due to transportation and supply chain effects.
The burden of this adjustment is not distributed equally. Inflation acts asymmetrically between households.
The last Household consumption expenditure survey reports that the lowest rural deciles continue to spend disproportionately on food, fuel, transportation and consumer staples.
Food alone represents almost 47 percent of rural consumption expenditure in India, while fuel, lighting and transport take up another significant share. Informal workers and fixed-income households have much weaker negotiating power protect real wages against inflationary shocks. In such contexts, currency depreciation becomes more than a macroeconomic adjustment mechanism. This becomes a regressive transfer of purchasing power.
This is precisely why the Indian central bank or the government has never behaved as if the rupee was a purely market-determined variable, despite official claims of a “market-determined exchange rate regime.”
The Reserve Bank of India (RBI) has intervened several times and aggressively on foreign exchange markets during episodes of volatility. Policymakers themselves recognize that sharp movements in exchange rates have fiscal, political and social consequences that go well beyond classical macroeconomics.
Recent empirical analysis India’s exchange rate management suggests that the country has, at different times, operated under several implicit exchange rate regimes, although it has formally maintained a market-determined framework.
Between late 2023 and late 2024, India effectively operated at what amounted to near de facto parity, with annualized volatility between the rupee and the dollar falling to just 1.5%, the lowest level in almost 25 years. THE The IMF itself subsequently reclassified India’s foreign exchange arrangement is considered ‘stabilized’.
This creates a significant contradiction within Orthodox doctrine.let the rupee floatIf clean market adjustment were truly sufficient, the RBI would not repeatedly intervene through spot market operations, futures positions and reserve management to mitigate volatility.
The scale of these interventions has become increasingly difficult to ignore. India’s foreign exchange reserves fell by approximately $728 billion at their peak for closer to $690 billion in a context of sustained intervention pressures. Simultaneously, the RBI’s forward net short position in the dollar would have been crossed 100 billion dollarsindicating that interventions have increasingly shifted to futures markets rather than disappearing altogether.
This is not evidence of irrational policy. This reflects the recognition that emerging market currencies operate under fundamentally different conditions from those of advanced economies. In financially open but structurally vulnerable economies, exchange rate depreciation can quickly fuel in capital flightimported inflation, strains on corporate balance sheets and self-reinforcing expectations of instability.
The conventional assumption that weaker currencies naturally boost exports is also exaggerated in the Indian context. This logic comes from an earlier era of industrial production where export sectors were massively dependent on domestic inputs.
Modern manufacturing works very differently. Much of India’s export economy remains deeply dependent on imported intermediate goodscomponents, machines and energy inputs.
A weakening of the rupee therefore does not automatically generate an export boom. This often simultaneously increases production costs.
Manufacturing of electronic devices, pharmaceuticals, chemicals, renewable energy and automotive components remain highly dependent on imported supply chains. For many micro, small and medium businesses (MSMEs) already operating with compressed margins and expensive credit terms, depreciation increases input costs faster than export competitiveness improves.
Recent data on India’s export responsiveness further complicates the conventional assumption that currency weakness automatically boosts competitiveness. Indian exports seem much more responsive changes in global demand conditions rather than movements in exchange rates themselves.
External demand matters more than currency weakness. India is not primarily constrained by an overvalued exchange rate. It is forced through manufacturing depth, logistics, productivity, scale and integration into higher value-added global supply chains.
This is where the broader political debate often becomes misleading and binary. The choice is not between an unsustainable monetary fixation or a completely unmanaged float. Emerging economies have always resorted to calibrated interventions, precisely because external markets do not always self-stabilize.
Foreign exchange reserves in countries like India do not exist simply to “defend” currencies in a mercantilist sense. They perform insurance functions against external shocksoil price volatility, sudden capital outflows and geopolitical disruptions. The Asian financial crisis left deep institutional memories in emerging markets on the dangers of over-reliance on market-specific adjustment.
Even reviews intervention organizations increasingly recognize the importance of managing volatility. The more relevant question is not whether an intervention should exist, but how it should be designed. Strategic and transparent intervention mechanisms, including forward guidance, calibrated deployment of reserves and targeted external financing windows, may ultimately prove less destabilizing than rigid anchors or sharp market-driven depreciations.
In advanced economies, exchange rate flexibility can essentially function as a macroeconomic adjustment. However, in economies like India, it also functions as inflation transmission, distributive redistribution, and political and economic shock.
And this is precisely why the rupee cannot be treated as just another market price of a product whose value can depreciate freely – and which is left entirely to market forces alone.
Originally published under Creative Commons by 360infos™.