The rupee has been on a , sliding sharply against the US dollar as the global oil shock deepens and tensions in West Asia continue to disrupt energy markets.
With crude oil prices remaining elevated amid the ongoing conflict and fears growing around supply disruptions in the Strait of Hormuz, many economists now believe the rupee touching 100 against the dollar may no longer be unthinkable.
Yet despite repeated intervention by the Reserve Bank of India (RBI), the central bank does not appear to be trying to completely stop the rupee from falling.
Instead, economists increasingly believe the RBI’s strategy is something more nuanced: allow gradual depreciation, but prevent panic.
In simple terms, the RBI appears comfortable with the rupee weakening slowly, but not collapsing suddenly in a way that creates fear across financial markets and the broader economy.
At first glance, allowing the rupee to weaken may seem counterintuitive. After all, a weaker rupee raises India’s import bill, pushes up fuel prices and worsens inflation pressures.
But economists say trying to aggressively defend the currency during a global oil shock .
India imports the majority of its crude oil requirements. Every time the rupee weakens sharply, India effectively pays more for everything it imports, especially crude oil.
That eventually trickles down into petrol prices, transport costs, airfares, electronics, grocery bills and manufacturing expenses.
At the same time, trying to artificially hold the rupee at a fixed level can become extremely expensive for the central bank.
When the currency comes under pressure, the RBI typically steps in by selling dollars from India’s foreign exchange reserves into the market. The idea is simple: increase dollar supply and slow the rupee’s fall.
But in volatile markets, even small currency moves can require massive intervention.
Economists say the RBI can sometimes end up spending billions of dollars merely to prevent the rupee from weakening by a few paise during periods of panic-driven trading.
That is because currency markets are heavily influenced by sentiment.
If traders believe the RBI is aggressively defending a specific level — such as the psychologically important 100-mark against the US dollar — speculative pressure can intensify further as markets begin testing the central bank’s resolve.
This is one reason why several economists now argue that allowing gradual depreciation may be more sustainable than trying to rigidly defend symbolic exchange-rate levels.
Former NITI Aayog Vice Chairman and Chairman of the 16th Finance Commission Arvind Panagariya recently urged the RBI not to allow the “psychology” of the Rs 100-mark to dictate policy decisions.
“100 is just a number, like 99 and 101,” Panagariya .
According to him, allowing the rupee to depreciate during a prolonged oil shock may actually be more sustainable than exhausting reserves trying to defend a symbolic level.
“If the oil shortage is long-lasting, a resort to anything other than depreciation will be a losing proposition,” he argued.
This is because a weakening currency is not always purely negative for an economy. Economists say allowing the rupee to weaken slightly during a global crisis can sometimes reduce pressure on the economy — much like a pressure valve releasing steam.
When the rupee depreciates, imports become more expensive. That naturally discourages unnecessary foreign purchases and reduces pressure on India’s forex reserves.
At the same time, Indian exports become relatively cheaper in global markets, potentially helping exporters.
Former IMF Deputy Managing Director and Harvard University professor Gita Gopinath recently argued that policymakers should focus less on the symbolic exchange-rate level itself and more on broader economic outcomes like inflation, jobs and output.
“The relevant number is not the actual value of the exchange rate,” Gopinath said in a recent interview.
“What matters is jobs, inflation and output,” she added.
That view is increasingly gaining support among economists who believe exchange rates should sometimes act as shock absorbers during external crises.
Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, described the rupee’s weakness as both a problem and a solution.
“Rupee depreciation is partly a problem and partly a solution to the problem,” he said.
“Rupee depreciation boosts exports and at the same reduces foreign exchange expenditure. Expensive dollar can curtail forex expenditure more than austerity appeals.”
Even so, economists caution that there is a major difference between gradual depreciation and a disorderly collapse.
A rapidly weakening rupee can quickly trigger imported inflation in a country as dependent on imports as India.
Everything from crude oil and edible oils to fertilisers, electronics and industrial inputs becomes more expensive when the rupee falls sharply. Those higher import costs eventually spread through the broader economy through fuel prices, transport costs, grocery bills and manufacturing expenses.
“Expensive dollar leads to imported inflation. That’s why the RBI is trying to stabilise the rupee through intervention,” Vijayakumar said.
According to Kaveri More, Commodity Analyst at Choice Broking, the RBI’s biggest concern is preventing disorderly market behaviour.
“The Indian government and RBI remain highly sensitive to sharp rupee depreciation because a weaker currency increases India’s import bill, especially for crude oil and gold, widening the current account deficit and raising external financing pressure,” she said.
A rapidly weakening rupee can also scare foreign investors, increasing capital outflows and putting even more pressure on the currency.
“The RBI’s primary objective is therefore to prevent disorderly depreciation that could trigger inflation, investor panic, and broader macroeconomic instability,” More added.
The RBI has therefore been intervening actively in currency markets, but selectively.
Rather than defending a fixed exchange-rate level, economists believe the central bank is mainly trying to reduce excessive volatility and speculative panic.
The central bank has been using a combination of dollar sales, liquidity management measures, restrictions on speculative currency positions and steps aimed at controlling excessive dollar demand.
“To stabilise the rupee, the RBI intervenes through dollar sales, liquidity management, restrictions on banks’ open currency positions, and measures to curb non-essential imports,” More said.
This strategy allows the rupee to gradually adjust to changing global conditions while avoiding panic-driven moves that could destabilise financial markets.
Several economists also argue that India’s current position is fundamentally stronger than during the 2013 taper tantrum, when the rupee came under severe pressure.
Back then, inflation was running in double digits, macroeconomic imbalances were larger and India’s external vulnerability was significantly higher.
“This is not 2013,” Panagariya argued in his post, pointing to stronger monetary management and relatively lower inflation levels today.
India also continues to hold sizeable forex reserves – nearly 700 billion dollars – giving the RBI more flexibility to manage volatility.
That does not mean the risks are small. If crude oil prices remain elevated for a prolonged period, inflation pressures could intensify sharply and growth could weaken further.
But economists increasingly believe the RBI’s goal is no longer to rigidly defend a specific rupee level. Instead, the strategy appears to be allowing the rupee to weaken gradually while preventing panic, capital flight and runaway inflation.