The Reserve Bank of India’s (RBI) tolerance for a free-falling, undervalued rupee is a fresh and pragmatic approach as the central bank has finally stayed away from attempting to defend any symbolic line in the sand. For far too long, central bankers and successive governments have preferred to leave the currency over-valued even though an artificially strong rupee doesn’t really help India’s exporters who trade in a competitive global market.
An undervalued currency will help exporters discover some new markets and should help improve the trade balances with some countries. With the India-US trade deal not having been signed yet, exports are clearly suffering. So far in FY26, exports have been more or less flat.
Impact of rupee depreciation on imports
While a cheaper rupee will no doubt push up imported inflation, the low inflationary environment at home will help cushion the impact of costlier imports. Globally too, inflation has been benign though of late prices of some commodities, like copper, have been rising. Fortunately, prices of crude oil have been stable around the $63-64/barrel level.
The RBI, by some estimates, sold nearly $38 billion in dollars in the January-September period with the intervention taking place both in the spot market and in the non-deliverable forward market. Apart from the fact that precious forex reserves were being used up, intervening in the forex market leaves less rupee liquidity in the system. That is undesirable at a time when the central bank is working to ensure that interest rates in the system come down and boost loan growth. The central bank has quite a few reasons to be careful about using its forex reserves to intervene in the market.
Foreign investors continue to exit Indian markets
For one, foreign portfolio investors continue to take money off the table even as a buoyant primary market has seen private equity players sell shares in their investee companies. Also, foreign direct investment (FDI) inflows have not been encouraging. FDI flows via the equity route were down 11% in the July-September quarter compared with the previous quarter. In fact, the capital account surplus reduced to 0.1% of GDP in the September quarter versus 0.8% of GDP in Q1.
But the rupee crossing the 90-to-the-dollar mark is more than a psychological breach; it illuminates structural weaknesses that India has long known about but rarely confronted with urgency. The story is clear: India’s external balance is under strain, capital flows are uneasy, and policy complacency is no longer affordable. What looks like relief to exporters often becomes pain for everyone else. India imports far more than crude oil: energy, electronics, capital goods, fertilisers, and critical components. All of them now become costlier.
That feeds into inflation, dents corporate margins, and quietly taxes consumers through higher prices. The danger is not the number itself but the trend behind it. For example, India’s insufficient export depth. The country still sells too few sophisticated products to the world and buys too many high-value inputs. When global risk appetite turns even slightly nervous, portfolio money leaves, the dollar strengthens, and the rupee bears the shock.
The result is a currency that behaves predictably—and uncomfortably. The warning has arrived and the policymakers must do three things urgently. First, exports need a serious strategy reset. Second, foreign capital must be attracted not by hot money but by confidence—stable tax policy, regulatory predictability, and a credible reform timeline. Third, import dependence must be tackled with realism. Self-reliance is not about isolation; it is about capability.
