Montek Singh Ahluwalia says India’s obsession with strong rupee is economically flawed

Speaking at The Indian Express Idea Exchange, Ahluwalia said the common assumption that India must always aim for a stronger rupee is economically flawed. His remarks come at a time when the rupee has been under sustained pressure against the US dollar, with global oil risks, foreign portfolio outflows, dollar demand and geopolitical uncertainty keeping currency markets volatile.

Ahluwalia said the rupee’s movement must be understood as a signal of broader economic conditions, not as a target to be defended at all costs.

“It is true, if the economy is strong, that the rupee will tend to appreciate. So the appreciation of the rupee is a signal of the economy being strong,” he said. “And when the economy is weak, for a variety of reasons, the rupee will depreciate, reflecting this economic position.”

He added that trying to make the rupee strong when market conditions point towards depreciation can worsen the problem.

“To make the rupee strong when the market condition is required to depreciate will only make the economy weaker,” Ahluwalia said.

‘Strong rupee’ is not the same as strong economy

Ahluwalia’s central point was simple: a strong currency can reflect a strong economy, but it cannot substitute for one.

In other words, if productivity, exports, investment flows and macroeconomic fundamentals are strong, the currency may naturally strengthen. But if the economy is facing pressure — such as higher import costs, capital outflows, widening trade deficit or global dollar strength — forcing the currency to remain artificially high may hurt export competitiveness.

This matters because a stronger rupee makes imports cheaper, but it can also make exports less competitive. A weaker rupee, on the other hand, raises the cost of imported goods such as crude oil, electronics, fertilisers and edible oils, but can support exporters by making Indian goods cheaper in overseas markets.

For a country like India, which imports a large share of its crude oil requirement and also wants to expand manufacturing exports, currency management is always a balancing act.

Why defending rupee can become costly

Ahluwalia also warned that defending the rupee too aggressively can result in a loss of foreign exchange reserves.

“You may be able to do that if you want to lose a lot of reserves. Most probably that won’t work. But it will weaken the economy,” he said.

The Reserve Bank of India usually intervenes in the foreign exchange market to curb excessive volatility, not to fix the rupee at a particular level. It can sell dollars from its foreign exchange reserves to support the rupee when the currency comes under sharp pressure. But repeated dollar sales reduce reserves.

This is why economists often distinguish between preventing disorderly movement and defending a specific exchange rate. The former is part of currency management. The latter can become expensive if market pressure is strong and persistent.

‘Rupee strong like the Himalayas’: Montek recalls 1997 moment

Ahluwalia also recalled the political sensitivity around the rupee during the 1997 East Asian financial crisis, when several Asian currencies came under pressure.

He referred to a reported remark by the late Sushma Swaraj that India’s rupee should be “strong like the Himalayas”. Ahluwalia said he had a high opinion of Swaraj, calling her a knowledgeable and good minister, but used the episode to explain how currency depreciation often becomes politically charged.

“I remember Bimal Jalan had to go and speak to Prime Minister Vajpayee. I understand the nationalism, but please control your ministers,” Ahluwalia said.

The larger point, he suggested, was that currency weakness is often seen as a national embarrassment, when it may actually be part of a necessary economic correction.

Colonial history and the rupee debate

Ahluwalia also drew on India’s economic history to explain why the obsession with a strong rupee is misplaced.

He said that in the early 20th century, Indian nationalist and social leaders criticised the British for keeping the exchange rate artificially appreciated. According to that criticism, the colonial administration’s exchange-rate policy made it more difficult for India to export.

“In our own history, in the early parts of the 20th century, our nationalist, political and social fellows were actually blaming the British for fixing the exchange rate to appreciate it,” he said.

This, Ahluwalia argued, shows that a strong currency has not always been viewed as good for the economy. At times, an overvalued currency can hurt exporters and domestic producers.

Current rupee pressure gives remarks timely relevance

Ahluwalia’s comments are especially relevant at a time when the rupee has faced renewed pressure against the US dollar.

In recent weeks, the rupee has slipped to record-low levels, pressured by elevated crude oil prices, foreign outflows, dollar demand from importers and uncertainty linked to the West Asia conflict. The RBI has also been seen intervening in the foreign exchange market to smooth volatility.

The pressure on the currency has coincided with a decline in India’s foreign exchange reserves from recent highs. This makes Ahluwalia’s warning significant: using reserves to prevent depreciation can buy time, but it cannot change the underlying market direction if the pressure is structural.

Depreciation may be a correction, not just weakness

Ahluwalia said the recent depreciation of the rupee should also be seen as a correction of earlier overvaluation.

“The depreciation that the rupee has seen actually corrects the real appreciation that took place in the earlier regime, the previous four years. And I think that was a mistake,” he said. Ahluwalia said India had used reserves earlier to prevent depreciation, which may have delayed the adjustment.

“We were using the currency, the reserves, to prevent a depreciation. That’s why the depreciation now is so large,” he said.

What it means for consumers and businesses

For ordinary consumers, rupee depreciation can raise the cost of imported items and fuel inflation if global commodity prices are also high. Since crude oil is priced in dollars, a weaker rupee can increase India’s oil import bill and eventually feed into transport, logistics and input costs.

For companies, the impact depends on their business model. Exporters in certain sectors like chemicals and pharmaceuticals may gain from a weaker rupee because overseas earnings translate into more rupees. 

Whereas import-heavy sectors, including oil marketing, electronics, aviation and some manufacturing segments, may face higher costs. For the government and RBI, the challenge is to prevent sharp, disorderly currency moves without exhausting reserves or damaging competitiveness. 

Ahluwalia’s argument is not that the rupee should be allowed to fall unchecked. His point is that citizens and policymakers should not confuse currency strength with economic strength.

A stable currency is desirable. But an artificially strong currency can create hidden costs — weaker exports, reserve depletion and delayed adjustment.  

The more durable way to support the rupee, economists argue, is to strengthen the economy’s fundamentals: improve exports, attract stable capital flows, manage inflation, reduce external vulnerabilities and build productivity.

That is the distinction Ahluwalia underlined: a strong economy can produce a strong rupee, but a forced strong rupee cannot produce a strong economy.