Let’s not fight ₹ depreciation

The current economic context would suggest that calibrated rupee depreciation is not just inevitable, but desirable

- SAJJID Z CHINOY

Last week’s depreciation of the rupee vis-à-vis the dollar has raised some anxiety in markets. It should not. From an economic perspective, it’s very important not to conflate a strong currency with a strong economy. Instead, measured rupee depreciation is both inevitable, and desirable, in the current macro environment.

This piece offers four reasons why:

1. Responding to fundamentals

Exchange rates are typically meant to be an economy’s “shock absorber” to external pressures or changing economic fundamentals so that other variables in the economy don’t have to undergo disruptive changes. If movements in the exchange rate can help equilibrate “external balances”, monetary and fiscal policy is freed up to focus on trying to achieve “internal balance”.

The dynamics of the balance of payments in India over the past one year have become less favourable. The current account deficit (CAD) is expected to double from $23 billion (0.6 per cent of gross domestic product, or GDP) in FY25 to about $55 billion (1.3 per cent of GDP) in FY26, reflecting declining terms of trade (higher gold prices and the risk of tariffs impacting exports). To be sure, a CAD of 1.3 per cent of GDP is very sustainable but it has also been accompanied by a discernible slowing of foreign direct investment and portfolio inflows in recent years. Both these forces (a widening CAD and slowing capital inflows) have put pressure on the balance of payments and the rupee in recent months. These changing fundamentals would argue for a new — weaker — equilibrium for the rupee.