The sharp slide of the Indian rupee in recent months demands an urgent and decisive shift in policy. The rupee has already weakened by more than 6% in the current calendar year despite repeated interventions by the Reserve Bank of India. The RBI has sold dollars aggressively through State-run banks, tightened rules on banks’ open positions, curbed participation in offshore non-deliverable forwards, and reportedly unwound nearly $40 billion in speculative positions by mid-April. It has now announced a fresh $5 billion dollar-rupee buy-sell swap auction to stabilise the currency market. Yet these measures have failed to arrest the rupee’s decline because they address symptoms rather than the underlying cause. The long-term futility of such interventions is borne out by the fact that between 2023 and 2024, the RBI had similarly burnt substantial foreign exchange reserves to smoothen depreciation and keep the rupee artificially stable. While this had staved off depreciation for a bit, the present fall reflects delayed adjustment as much as current weakness and pressures. Yesterday’s temporary rebound of the rupee to 96.30 against the dollar following lower crude prices and softer US treasury yields further demonstrated the currency’s dependence on external conditions. This marginal course correction of the rupee was also aided by the speculation that the RBI is planning a 50-basis-point hike between June and August.
This must be the principal intervention going forward. Raising interest rates is the most direct and credible way of increasing the price of money, supporting the rupee, discouraging capital flight, and anchoring inflation expectations. The continuation of relatively accommodative monetary conditions under present circumstances risks deepening the crisis. A weak rupee raises the landed cost of crude imports, fuels inflationary pressures, widens the current account deficit, and compels further depletion of reserves to defend the currency. This creates a vicious cycle in which inflation, currency depreciation, and reserve losses reinforce one another. Banks and sections of industry may resist higher interest rates because tighter monetary conditions reduce credit growth and raise borrowing costs. But such concerns cannot take precedence over macroeconomic stability. Inflation erodes household purchasing power far more severely than temporary moderation in lending activity. The burden of rising fuel prices, transport costs, and food inflation falls overwhelmingly on ordinary citizens. Stability of the rupee must presently rank above the pursuit of rapid growth sustained by a weakening currency.