Every few months, the rupee sneezes, and India catches a cold. The Indian rupee has broken past Rs 88 to the dollar, and there is an expectation that the Reserve Bank of India would intervene to prop the currency up. It’s typical to treat every fresh low as a crisis. But what if India treated it as a strategic opportunity?
Countries that transformed their economies — from Japan in the 1960s to China in the 2000s — did exactly that. They used competitive exchange rates as part of their industrial strategies.
India must rethink its approach. Instead of defending the rupee at all costs, the Narendra Modi government should embrace a policy of gradual depreciation. This calibrated move would not only strengthen export competitiveness but also align India with the realities of global trade.
RBI data shows India’s foreign exchange reserves stand at $695 billion, which is sufficient to cover nearly 11 months of imports.
However, beneath this stability lies a paradox. While India’s share in global services exports surged to 4.3 per cent in 2023, its share in goods exports is under 2 per cent — almost exactly where it was at Independence. This fragility has been laid bare by the Trump administration’s recent 50 per cent tariff on Indian merchandise exports to the US. Amid such protectionist policies, holding the rupee strong would be self-sabotage, as Indian exporters face higher costs abroad.
Lessons from history
From the 1960s to the 1980s, Japan kept the yen weak while promoting its industries. This boosted exports, resulting in the domination of Japanese automobile and electronics industries. It wasn’t until the Plaza Accord that the Japanese currency appreciated.
South Korea followed a similar path in the 1980s and the 1990s. The country ensured that the won remained competitive even as domestic costs rose, which allowed Samsung and Hyundai to expand globally.
From 1994 onwards, China tightly managed the yuan, giving its exporters price competitiveness. This strategy helped lift China’s share of global trade from 4 per cent in 2001 to nearly 15 per cent by 2022.
The United States too provides an early example. Franklin D Roosevelt’s decision to devalue the dollar after abandoning the gold standard in the 1930s revived exports and industrial production, helping the country climb out of the Great Depression.
India’s own experience in 1991 shows the merit of currency adjustment. A sharp devaluation, coupled with liberalisation reforms, helped kickstart a decade in which exports grew at nearly 20 per cent annually, and foreign exchange crises became far less frequent.
Even in recent years, countries have used exchange rates as tools of economic policy.
In the past two years, Brazil has shown how a weaker currency need not trigger panic if it is managed correctly. As the Brazilian real depreciated, the central bank raised policy rates from 10.4 per cent to 14.7 per cent to anchor inflation, instead of burning reserves.
Under President Javier Milei, Argentina scrapped capital controls and allowed the peso to float freely. The currency fell steeply, but the adjustment was part of deliberate shock therapy. Inflation, which was nearly 300 per cent in April 2024, dropped below 50 per cent a year later.
Egypt’s path has been more incremental. Facing a severe shortage of foreign exchange, Cairo opted for a gradual, “crawling” devaluation while hiking policy rates by 600 basis points. The Egyptian pound weakened steadily, restoring access to the dollar and improving investor confidence.
Turkey is a cautionary tale. It cut interest rates amid double-digit inflation, triggering a collapse of the lira — more than 50 per cent between 2021 and 2022. In the first quarter of 2022, around $20 billion — equivalent to approximately 50 per cent of Egypt’s official foreign reserves — moved out of the country. This shows the danger of depreciation without discipline.
The critics’ case
Sceptics of a weaker rupee argue that it would stoke inflation. While a cheaper rupee would certainly raise the cost of crude oil imports, it’s important to note that inflation in India today is primarily food-driven, not currency-driven. Moreover, India’s strong foreign reserves, long-term LNG contracts, and a diversified energy basket mean the country is better shielded from external energy price shocks than before. A depreciation of 2-3 per cent annually would hardly result in massive inflation.
The second concern is that depreciation will scare away investors. Hardly true. Vietnam’s dong has depreciated steadily over the past two decades, even as the country has emerged as one of the world’s top destinations for foreign direct investment. Global investors care less about symbolic currency strength and more about growth prospects, macroeconomic stability and credible policy frameworks. In this sense, an artificially strong rupee may actually be a greater deterrent than a competitive and flexible one.
The third charge is that a weaker currency signals economic weakness. Again, context matters. The rupee at Rs 88 today is already testing record lows despite heavy intervention, which is proof that defending arbitrary levels is futile. What’s important is how depreciation is managed. Brazil and Egypt are great examples of how deliberate depreciation can be seen as reformist and pragmatic. Turkey shows the opposite: erratic and unorthodox management invites suspicion and volatility. With its strong institutional reputation and monetary conservatism, India is much closer to the former than the latter.
Why it matters for jobs
India adds nearly a million new workers to its labour force every month, a scale that services exports alone cannot absorb. Export-oriented manufacturing must fill the gap, whether in garments, footwear, electronics, or automobile components.
Bangladesh doubled its share in the global garment trade by keeping the taka competitive, effectively converting low-cost labour into global exports. India, despite having abundant labour, has stagnated in sectors such as garments and footwear, in part because an overvalued rupee has made local production relatively expensive.
A credible framework
The first principle is competitive stability. Rather than defending arbitrary thresholds, the RBI could allow the rupee to weaken gradually — for instance, by 2-3 per cent annually against the dollar. An undervalued exchange rate would give exporters a competitive edge while allowing importers time to adjust.
Second, India’s $689 billion foreign reserves should not be used every time the market moves significantly. It may serve political optics, but it would not be a good economic strategy.
Third, an orthodox monetary policy must remain the anchor. Inflation expectations must be managed using interest rates and clear communication.
Finally, structural support is essential. Cutting tariffs on intermediate goods would allow manufacturers to source inputs at global prices. Expanding export credit and insurance would help Indian firms de-risk their global expansion. Investments in ports, logistics, and skilling would ensure that depreciation translates into new orders and jobs rather than simply higher input costs.
At Rs 88 to the dollar and facing punitive US tariffs, India has the choice to either burn its reserves or manage the rupee strategically to defend jobs and exports. When Roosevelt devalued the dollar in the 1930s, critics called it reckless. History remembers it as renewal. When China managed its yuan for decades, critics called it manipulation. History records it as industrialisation. India too can write its chapter. The rupee’s fall could be the first step.
Bidisha Bhattacharya is an Associate Fellow at Chintan Research Foundation, New Delhi. She tweets @Bidishabh. Views are personal.
(Edited by Prashant)
The very same people who had problems with rupee between 50 and 60, are now advocating still more fall. (The question is not falling per se ,but the value of rupee at one stage indicates the efficiency of the Govt in utilizing/wasting/misdirecting the resources at hand). That clearly indicates lack of balance and direction.