The Indian rupee crossed the significant psychological mark of 90 against the US dollar on Wednesday, December 4, 2025, sparking fresh debates on currency management. Over the past year, the rupee has depreciated by more than 6 per cent against the dollar, with even steeper falls against currencies like the euro and the pound. This movement has triggered concern in some sections, but a closer look at the economic landscape suggests that aggressive market intervention to artificially support the currency would be a misstep.
The Economic Backdrop: Trade Deficit and Capital Outflows
The rupee's decline is occurring against a challenging macroeconomic canvas. India's merchandise trade dynamics have weakened considerably. In October, overall merchandise exports contracted by approximately 12 per cent. Exports to the United States, a key market, fell by 8.6 per cent, partly due to the impact of tariffs imposed during President Donald Trump's administration.
On the other side, imports have surged. Notably, gold imports skyrocketed to $14.7 billion in October, a dramatic jump from $4.9 billion in the same month last year. This combination led to India's trade deficit swelling to a high of $41.7 billion.
Compounding the pressure from the trade front, capital flows have turned adverse. Since the start of the year, foreign portfolio investors (FPIs) have pulled out around $17 billion from Indian markets. While foreign direct investment (FDI) provided some cushion, with a net inflow of $2.9 billion in Q2, it has not been enough to offset the portfolio outflows. The Reserve Bank of India's (RBI) data shows the country's foreign exchange reserves depleted by $6.4 billion in the first half of the fiscal year. Lingering uncertainty over a potential India-US trade deal has further dampened market sentiment.
Monetary Policy's Primary Goal: Inflation, Not the Currency
The RBI's Monetary Policy Committee (MPC) is currently in its final meeting of the year, and its focus must remain clear. The primary mandate of monetary policy is to manage inflation, not to defend a specific exchange rate level. Currently, domestic inflation presents little cause for alarm, with the Consumer Price Index (CPI) recorded at a mere 0.25 per cent in October. This low inflationary environment significantly reduces concerns that a weaker rupee could import inflation.
Furthermore, heavy intervention in the foreign exchange market to prop up the rupee would have direct consequences for domestic liquidity. Sterilizing such interventions is complex and can disrupt the RBI's broader monetary management. Instead of targeting a particular rupee level, the central bank's role should be to smooth out excessive volatility and allow for a calibrated depreciation that acts as a natural economic shock absorber.
The Path Forward: Boosting Competitiveness
A weaker currency, while a symptom of underlying imbalances, can also provide a silver lining by making Indian exports more competitive in the global market. This is crucial in the current challenging environment. However, relying solely on exchange rate adjustment is not a sustainable strategy.
The government must complement this by decisively implementing policies that enhance productivity and improve the core competitiveness of Indian exports. This includes:
- Addressing structural bottlenecks in infrastructure and logistics.
- Incentivizing value-added manufacturing.
- Expediting the conclusion of long-pending trade agreements to secure better market access for Indian goods and services.
In conclusion, while the rupee's slide past 90 per dollar is headline-grabbing, it should not trigger a knee-jerk defensive response from policymakers. The RBI must stay focused on its inflation mandate, using its tools to manage volatility rather than levels. The real remedy lies in substantive government action to strengthen the foundations of the export economy.
