Fiscal Policy and the Declining Rupee: RBI Intervention Debate Explained

23 May 2026

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.

Term	Meaning
Rupee depreciation	Fall in the value of rupee against the dollar
Imported inflation	Inflation caused by higher prices of imported goods
FII	Foreign Institutional Investors who invest in financial markets
FDI	Foreign Direct Investment in long-term productive assets
Hot money	Short-term volatile capital that can quickly enter or exit a country
Front-loading of imports	Buying dollars/imports in advance due to expected future depreciation
Speculative capital flight	Capital outflow driven by expectations of currency weakness