The Indian Rupee’s Slide: Challenges and RBI’s Path to Stability

India’s rupee has recently crossed significant psychological thresholds, falling past 90 per US dollar and sparking widespread concern among households, businesses, and policymakers. This slide is not just a market event; it reflects deeper structural and cyclical forces that have implications for inflation, growth, and financial stability. The Reserve Bank of India (RBI) stands at the centre of efforts to manage this volatility, deploying a mix of market operations, regulatory tools, and strategic communication to prevent a currency crisis from becoming a broader economic shock.

Declining Rupee

The Rupee’s Fall: Symptom and Signal

The rupee’s weakness is driven by a combination of global and domestic factors. A strong US dollar, rising American interest rates, and global risk aversion have pushed investors toward safe-haven currencies, dragging down emerging-market currencies like the rupee. Domestically, India’s persistent current account deficit—fueled by heavy imports of crude oil, electronics, and gold—keeps the demand for foreign currency high, especially during periods of global stress.

This depreciation is felt in everyday life: higher petrol prices, costlier imported goods, and increased expenses for travel and education abroad. For policymakers, it signals that India’s underlying vulnerabilities—dependence on imported energy, limited export depth, and sensitivity to global capital flows—still require structural solutions, even as the economy grows rapidly.

How Did the Rupee Reach This Point?

Multiple forces converged to push the rupee down. Global investors shifted toward US Treasuries and dollar assets, making portfolio flows into Indian equities and bonds more volatile. Rising geopolitical tensions and supply-chain disruptions further amplified risk aversion, driving money into “safe” currencies at the expense of emerging markets.

Domestically, soft export growth and strong demand for imported machinery, electronics, and energy products kept the trade deficit wide. Even when global oil prices were not at record highs, the sheer volume of imports meant India’s dollar bill stayed heavy, making the rupee sensitive to every bout of global volatility. The rupee’s recent slide also corrects earlier periods of overvaluation, reflecting a more realistic exchange rate.

RBI’s Philosophy: Manage the Journey, Not the Destination

The RBI does not promise a fixed rupee–dollar rate. Its stated position is to allow a market-determined exchange rate while preventing “disorderly” movements—sharp, self-reinforcing swings that can destabilise markets and balance sheets. This approach recognizes that some depreciation is natural for a developing, inflation-prone economy, but overshooting in times of stress can be dangerous.

The RBI’s strategy also reflects the reality of finite foreign-exchange reserves. Using them aggressively to defend a specific level could burn through buffers and spook investors, so the central bank aims to smooth the path—leaning against the wind of speculation, calming markets, and buying time for deeper policy and structural responses.

RBI’s Toolkit for Stabilization

1. Direct Intervention in Currency Markets

The RBI routinely uses its reserves to sell dollars and buy rupees when the currency comes under intense pressure, supplying foreign currency directly to the market. These operations, conducted in the spot market and via forward contracts and swaps, help meet excess demand for dollars, dampen volatility, and signal that the central bank is willing to act.

Studies and internal RBI analysis suggest that such interventions can significantly reduce short-term exchange-rate and capital-flow volatility, especially when used to counter abrupt moves rather than to enforce a rigid level. By acting in size on days of extreme stress and stepping back when markets are calmer, the RBI uses its reserves as a shock absorber while preserving firepower for future episodes.

​2. Interest-Rate and Liquidity Moves

The RBI can influence the rupee through its interest-rate decisions and liquidity management. Higher policy rates make rupee-denominated assets more attractive to investors relative to foreign assets, supporting the currency at the margin and helping to anchor inflation expectations. When inflation is driven partly by imported factors—like a weak rupee raising fuel and input costs—this dual role of rate hikes becomes even more important.

The RBI also adjusts rupee liquidity in the banking system using instruments such as open-market operations (OMOs), variable-rate reverse repos, and changes in the cash reserve ratio. By tightening liquidity, it can nudge up short-term money-market rates, making speculative short positions against the rupee more expensive to hold. Conversely, if stress in financial markets threatens credit conditions, the RBI can inject liquidity even while continuing targeted FX interventions, balancing currency stability with domestic financial health.

​3. Managing and Shaping Capital Flows

The composition of capital flows matters as much as their size. Short-term, leveraged foreign flows can exit quickly, jolting the rupee, whereas long-term foreign direct investment (FDI) and stable deposits provide a more resilient buffer. The RBI influences this balance through macroprudential regulations and targeted schemes.​

On one side, it can tighten norms for external commercial borrowings and short-term foreign-currency debt, limiting excessive reliance on volatile funding. It can also curb speculative activity by adjusting exposure limits and margin requirements in FX derivatives markets, thereby reducing leverage-driven swings. On the other side, the RBI, often with the government’s support, can launch or fine-tune instruments such as special non-resident deposits or bond schemes, which historically have attracted stable foreign currency inflows during turbulent periods

4. Internationalising the Rupee

A more strategic pillar of rupee stability is the push to make the currency more widely used in international trade and finance. In recent years, the RBI has allowed banks to open Special Rupee Vostro Accounts (SRVAs), enabling foreign partners to settle trade directly in rupees. Under this mechanism, exporters are paid in rupees, while foreign buyers hold rupee balances that can be reinvested in Indian financial instruments such as government securities or corporate bonds.​
Alongside, the RBI has announced measures to promote wider international use of the rupee, including expanding the range of countries and sectors that can use rupee invoicing and settlement and working towards more robust rupee reference rates against major currencies. Over time, if more of India’s trade is priced and settled in rupees instead of dollars, the economy’s exposure to dollar swings will shrink, and the rupee will be less prone to sharp falls triggered purely by global dollar strength.

5. Clear Communication and Credibility

In currency crises, words can be almost as powerful as trades. The RBI’s communication—through policy statements, press conferences, and reports—shapes how investors and the public interpret its intentions and capacity to act. When the central bank reiterates that it has adequate reserves, a clear inflation-targeting mandate, and a flexible exchange-rate regime, it reassures markets that there is a coherent framework behind its actions.​

Conversely, any hint that the central bank is defending a specific level at all costs, or that policy is being driven by short-term political pressures, can invite speculative attacks. By consistently emphasising its goal of preventing disorderly movements, not micromanaging the rate, the RBI maintains policy credibility, making each intervention more effective and reducing the need for dramatic steps.

Short-Term Stabilization vs Long-Term Strength

The RBI’s toolkit is powerful, but it cannot by itself remove the root causes of rupee weakness. Lasting stability depends on broader economic choices: reducing oil dependence through renewables, raising export competitiveness, diversifying supply chains, and maintaining prudent fiscal policy. These lie mainly in the government’s domain, though the RBI can highlight their importance and coordinate where financial regulation and macro-stability overlap.​

In the short run, the central bank will continue to juggle FX intervention, interest-rate signals, liquidity management, capital-flow rules, and communication to keep the rupee’s slide orderly and contained. In the long run, a stronger, more resilient rupee will be the product not just of clever central banking, but of a more competitive, energy-secure, and fiscally disciplined economy—an outcome that is central to India’s ambition of being a leading global growth engine.

Way forward

The rupee’s slide is a stark reminder that rapid economic growth alone is not enough to insulate a country from global shocks. While the RBI’s toolkit is robust and its actions have so far prevented a full-blown crisis, the underlying vulnerabilities—especially India’s dependence on imported energy and its limited export diversification—remain a cause for concern. The central bank’s interventions are essential, but they are ultimately a stopgap measure. True resilience will come from structural reforms that reduce the economy’s exposure to external volatility.

In my view, the government and RBI must work in tandem to accelerate the transition to renewable energy, which would not only lower the import bill but also make India less vulnerable to global oil price swings. At the same time, there is a pressing need to boost export competitiveness by investing in manufacturing, technology, and logistics. Encouraging more Indian businesses to invoice and settle trade in rupees, as the RBI has started to do, is a step in the right direction, but it needs to be scaled up and supported by broader policy reforms.

Looking ahead, India’s policymakers should focus on building a more balanced and resilient economy. This means not just managing the rupee’s value, but also addressing the root causes of its volatility. By doing so, India can turn the current challenge into an opportunity to strengthen its economic foundations and secure a more stable future for its citizens. The rupee’s journey is far from over, but with the right mix of short-term action and long-term vision, India can navigate these turbulent waters and emerge stronger.