Fiscal Policy and the Declining Rupee: RBI Intervention Debate Explained

As of May 23, 2026, the Indian Rupee has seen a significant decline, reaching ₹97 per US Dollar. 

This has sparked a debate among economists on whether the Reserve Bank of India (RBI) should intervene or allow the market to determine the currency’s value.

Reasons for Depreciation

• High Oil Prices: A blockade in the Strait of Hormuz has made oil imports expensive. Since India imports 85% of its oil, this has increased the demand for dollars to pay for the import bill.
• External Inflation: High prices of imported goods like fertilizers from other countries further increase the dollar requirement.
• Capital Flight (FIIs): Foreign Institutional Investors are withdrawing money from the Indian stock market to invest in the USA, where interest rates have risen to 5%.

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Meaning of Exchange Rate

• Exchange Rate refers to the value of one currency in terms of another, such as how many rupees are needed to purchase 1 U.S. Dollar.

Current Situation

• The Indian Rupee has been continuously weakening against the U.S. Dollar, raising concerns regarding inflation, imports, and macroeconomic stability.

Reasons Behind Rupee Depreciation

• Rising Oil Prices: India imports nearly 85% of its crude oil requirements, and rising global oil prices increase India’s import bill and demand for dollars.
• External Inflation: Inflation in exporting countries increases the prices of imported goods such as fertilizers and machinery, thereby increasing dollar demand further.
• Capital Outflows by FIIs: Foreign Institutional Investors (FIIs) are withdrawing investments from India due to higher interest rates in the United States, leading to increased demand for dollars.

Debate: Should RBI Intervene?

View 1: Let the Rupee Find Its Market Value

Argument by Some Economists

• Economists such as Gita Gopinath argue that the Rupee should be left to market forces to discover its natural value.
• Impact of Depreciation on Exports: A weaker Rupee makes Indian goods cheaper globally, thereby increasing exports and improving trade competitiveness.
• Impact on Imports: Depreciation makes imports costlier, reducing unnecessary imports and helping correct the trade imbalance.
• Concern About RBI Intervention: If the Reserve Bank of India (RBI) stabilizes the Rupee artificially by selling dollars from forex reserves, export competitiveness may decline.

View 2: RBI Must Stabilize the Rupee

• Fear of Continuous Decline: Some experts argue that a continuously falling currency creates uncertainty and discourages trade and investment.
• Delay in Export Decisions: Foreign buyers may postpone purchases expecting further depreciation, which can reduce immediate export demand.
• Front-loading of Imports: Indian importers may purchase dollars in advance fearing future depreciation, thereby increasing speculative demand for dollars.
• Risk to Forex Reserves: Excessive RBI intervention through dollar sales may reduce foreign exchange reserves, creating risks similar to the 1991 Balance of Payments Crisis.

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Way Forward

• Focus More on FDI than FII: Foreign Direct Investment (FDI) is more stable and productive than volatile FII flows, often called “hot money”.
• Government Commitment Matters: Clear policy signals and credible interventions by governments can stabilize market expectations and currency volatility.

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