THE SOLUTION TO THE FALLING RUPEE LIES IN DIPLOMACY

News: At first glance, rupee depreciation looks puzzling, because India’s macro-fundamentals are strong: GDP growth: ~7.4% (robust) Inflation: Very low (CPI ~1.33%, below, RBI’s lower tolerance band)

Diplomatic issue, not an economic one

• Tariffs are being weaponised for geopolitical reasons
• Capital flows respond more to confidence and political risk than fundamentals
• As long as the India–US trade stalemate continues, capital outflows will persist

Devaluation is NOT the solution

• Export gains are limited: India’s exports have high import content
• Rupee depreciation raises input costs →export competitiveness gains are diluted
• Imports become costlier: India imports essential goods, Crude oil alone = ~25% of imports
• Inflation differential is low: Devaluation works when domestic inflation > global inflation
• Currency manipulation risks

The vicious cycle risk

• Rupee falls → investors fear more depreciation
• Capital outflows accelerate
• Stock markets suffer
• Higher expected returns demanded by investors
• Further pressure on the rupee

Way forward

• RBI can only smoothen volatility
• Prevent panic, ensure orderly adjustment
• Early trade and diplomatic understanding with the US
• Restore investor confidence