Clipped from: https://www.thehindubusinessline.com/opinion/editorial/rupee-outlook/article70330756.ece
RBI deploys right tools to control currency volatility
The RBI has struck a good balance here — between letting the rupee depreciate to improve the competitiveness of exporters, while also ensuring that the depreciation does not impact capital flows or importers too much |
The weakness in the rupee is back in focus. The currency is down by about 4 per cent against the dollar since the beginning of 2025. A double whammy has been at work here: the trade deficit has widened this fiscal, while capital flows too have dwindled. The latter has dipped for geo-political reasons, apart from sentiment perhaps taking a hit as a result of the trade-tariff deadlock with the US. The stress on the external account is likely to stay till a deal with the US is struck.
The merchandise trade deficit widened to $197 billion in the April to October 2025 period compared with $72 billion in the same period last fiscal year, as exports to the US declined. Simultaneously, foreign portfolio inflows have been flat this fiscal, even as investors pulled out $5.8 billion from equity and debt this calendar year. Net foreign direct investment flows have turned negative in recent months, and incremental NRI deposits have declined 40 per cent in the first half of this fiscal year. Further, the weakness in the dollar has resulted in the appreciation of other currencies against the currency. This has resulted in the rupee losing 15 per cent against the euro and 10 per cent against the pound in 2025. The rupee currently features among the worst performing emerging market currencies against the dollar.
However, the Reserve Bank of India (RBI) has done well to ensure orderly depreciation of the rupee, using the tools at its disposal judiciously. The RBI has struck a good balance here — between letting the rupee depreciate to improve the competitiveness of exporters, while also ensuring that the depreciation does not impact capital flows or importers too much. The central bank has net sold dollars worth $21.8 billion so far this calendar year, which is far higher than the sale of $12.3 billion in 2024. It had accelerated its dollar sales between October 2024 and January 2025, when the rupee came under stress due to massive foreign portfolio outflows, selling $55.7 billion in four months. But it has reduced direct interventions in the spot market since February, choosing to manage the currency through the rupee futures and forwards market. The net short positions in the rupee forward market have increased three-fold over the past year and outstanding positions in exchange traded currency futures are also increasing.
While the interventions in spot market appear to have increased again since September, the use of other markets to influence the currency has led to limited depletion of the reserves. The foreign exchange reserves are at $692 billion now, having recovered from the low of $624 billion in January. The IMF has also acknowledged in its recent staff report that the RBI is only intervening to curb excessive volatility, while classifying its forex policy as ‘crawl-like arrangement’. This is a vindication of the RBI’s policy of allowing the rupee to depreciate slowly and intervening only to prevent sharp one-way movement. A trade deal will, however, alter the situation.
Published on November 27, 2025
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