Rupee decline may not be bad for Economy now

RBI would do well to protect FOREX reserves

By Nantoo Banerjee

It does not make sense for India to deplete its hard-earned foreign currency reserves to temporarily protect the Rupee’s exchange value. In fact, Indian Rupee’s downturn vis-à-vis other major currencies has not adversely impacted the country’s impressive economic growth, at least for the present. On the contrary, it has made exports cheaper and imports dearer. This should help the country reduce its overall large annual trade deficits although increasing imports of cheap non-essential items from China continues to be a major concern. The country’s export growth in 2025 shows positive momentum, with significant year-on-year jumps in late 2025, particularly in November, reaching nearly 20 percent for merchandise, driven by key sectors like electronics, agricultural products, and services, despite some global trade challenges, leading to cumulative growth of over five percent for the April-November period. India should not be too concerned about its Rupee exchange-rate fall as long as it does not hurt the economic growth.

India’s central bank intervened aggressively in currency markets during December, selling dollars to prop up the rupee, echoing its earlier heavy-handed efforts to stem a one-way decline in the currency rate. The rupee rallied to an intraday high of 89.75 against the US dollar on the interbank order matching system, from near 91.00 seen prior to the intervention. It was last trading at 90.28. The Indian Rupee’s downturn has outpaced the US Dollar’s own decline since April, 2025. In October, the RBI sold a net $11.9 billion to support the Rupee. As in the past, it proved to be only temporarily effective. The RBI intervention has failed to arrest the Rupee’s decline. The exchange value of INR in 2025 showed a much bigger loss to other major global currencies such as EURO (21 percent), Pound Sterling, Australian $, Japanese Yen, and UAE’s Dirham than US$. It may be time for Indian exporters to seriously try to tap these markets to push Indian goods and services while containing higher priced (in Rupee) non-essential imports.

At the same time, it must be appreciated that the RBI has been trying to continuously bolster India’s foreign exchange reserves which saw a significant increase of $1.68 billion, reaching $688.94 billion, in the third week of December. It was primarily driven by higher gold holdings and a modest rise in foreign currency assets. The country’s gold reserves strengthened considerably, reflecting a diversification strategy. Special Drawing Rights (SDR) and the IMF reserve position also saw slight upticks. As of last September, the RBI held approximately 880 tonnes of gold, with a significant portion (around 575.8 tonnes) now stored domestically in India — marking a major shift towards onshoring reserves — while about 290.3 tonnes remain with the Bank of England (BoE) and Bank of International Settlements (BIS). This increased domestic storage reflects a strategic move to secure assets amid global financial uncertainties, with the RBI bringing back 274 tonnes since March 2023.

The massive hot money outflow from the Indian market during the year is principally responsible for the decline of INR’s exchange value by over six percent against US$. Foreign Portfolio Investors (FPIs) have sold Indian equities worth over Rs 14,000 crore so far in December, taking total outflows in 2025 to Rs 1,57,860 crore. This is more than 50 percent of their total investment in the Indian market. There is nothing unusual for such a large hot money movement although globally big hot money outflows often lead to devaluation of domestic currency. They could also cause inflation and hurt financial stability by disrupting local credit markets. Fortunately, the continuous hot money outflow from the Indian market through 2025 failed to disrupt the country’s economy and the stock market. The hot money exit failed to create much market volatility in India. Notably, the country’s current inflation level is among the lowest in recent memory. The reasons are good enough for the RBI not to deplete its foreign reserves to temporarily protect the exchange value of Rupee. For now, the RBI would do well to protect its forex reserves and not become too concerned about protecting the Rupee.

Foreign investors may have pulled out billions from Indian markets in 2025, but domestic funds continue to push stocks higher. The year witnessed massive and consistent investment in the Indian stock market by domestic mutual funds, driven by strong and resilient Systematic Investment Plan (SIP) inflows from retail investors. This surge in domestic flows has been a key stabilizing force, often counterbalancing significant FPI outflows. Mutual funds have injected over Rs.400,000 crore into equities in 2025, with projections suggesting the total could surpass Rs.500,000 crore by the year-end. This marks the fifth consecutive year of positive net equity flows from domestic mutual funds. The exit of large foreign portfolio investments (FPI) or speculative capital from the market should not be a matter of concern for the economy.

Instead, the government should go all out to attract long-term foreign direct investment (FDI) as it recently did in the case of 100 percent foreign equity in insurance. Despite the continuing good economic growth and high domestic consumption benefiting almost all foreign manufacturing and services companies in India, the net FDI inflow into the country continues to be weak. To give an example, Apple Inc, a recent entrant with manufacturing facility, showed a strong growth in FY25, with revenue hitting around Rs.79,000 crore and net profit rising 16 percent to Rs.3,196 crore, driven by robust iPhone demand (especially iPhone 16/17 series), increased local manufacturing (“Make in India”), and expanding retail footprint, solidifying India as a key market with record iPhone shipments and market share gains despite global slowdowns.

Yet, India witnessed a very low, even negative, rate of net FDI inflow in several months of the current year, meaning more FDI flowed out (repatriation/outward investment) than came in, despite good gross inflows, due to factors like high outflows, global uncertainty, and shifting investor sentiment. This contrasts with gross inflows which remained strong, but repatriation and Indian companies investing abroad significantly reduced the net figure, leading to sharp drops and negative months. A high rate of net FDI inflow will substantially help stabilise the exchange value of the INR. (IPA Service)