Why India Cannot Let the Rupee Float |
Pacific Money | Economy | South Asia
Why India Cannot Let the Rupee Float
Imported inflation, fragile manufacturing, and unequal burdens complicate textbook arguments supporting unrestricted currency depreciation across India.
India’s exchange-rate debates often proceed as though the price of the rupee were merely another financial price best left to market correction and macroeconomic adjustment. In theory, a weakening currency performs a useful balancing function. Imports become costlier, domestic demand adjusts, exports become more competitive, and external imbalances gradually stabilize. It is a clean textbook mechanism, elegant in abstraction, and widely accepted within orthodox macroeconomics.
But, economies, especially emerging market economies, do not experience exchange-rate depreciation in abstraction. They experience it through speculative attacks, fuel prices, transport costs, electricity bills, food inflation and falling real wages.
What often disappears in these debates is that currencies do not depreciate uniformly across society. Their effects travel unevenly through economies, across classes, sectors and regions.
India imports nearly 88.6 percent of its crude oil requirements, close to half of its natural gas consumption, substantial fertilizer inputs, edible oils, electronics components, and industrial intermediates. These are not discretionary imports that households or firms can easily reduce in response to a weaker currency. Their demand remains structurally inelastic in the short run.
This distinction matters enormously. In economies dependent on essential imports, depreciation rarely produces an immediate compression in import demand. Instead, it first raises domestic costs. Fuel prices rise, freight becomes costlier, fertilizer prices feed into agriculture, electricity generation absorbs higher input costs and food inflation gradually intensifies through transport and supply-chain effects.
The burden of that adjustment is not distributed evenly. Inflation acts asymmetrically across households.
The latest Household Consumption Expenditure Survey reports that the bottom rural deciles continue to spend disproportionately on food, fuel, conveyance and basic consumption.
Food alone accounts for nearly 47 percent of rural consumption expenditure in India, while fuel, light, and transportation absorb another significant share. Informal workers and fixed-income households possess far weaker bargaining power to protect real wages against inflationary shocks. In such contexts, currency depreciation becomes more than a macroeconomic adjustment mechanism. It becomes a regressive transfer of purchasing power.
This is precisely why the Indian central bank or the government has never behaved as though the rupee were a purely market-determined variable, despite official claims of a “market-determined exchange-rate regime.”
The Reserve Bank of India (RBI) has intervened repeatedly and aggressively in currency markets across episodes of volatility. Policymakers themselves recognize that abrupt exchange-rate movements carry fiscal, political and social consequences extending far beyond textbook macroeconomics.
Recent empirical analysis of India’s exchange-rate management suggests that the country has, at various points, operated across multiple implicit currency regimes despite formally maintaining a market-determined framework.
Between late 2023 and late 2024, India effectively operated under what amounted to a near de-facto peg, with annualized rupee-dollar volatility falling to just 1.5 percent, the lowest level in nearly 25 years. The IMF itself subsequently reclassified India’s exchange-rate arrangement as “stabilized.”
This creates an important contradiction within the orthodox “let the rupee float” argument. If clean market adjustment were genuinely sufficient, the RBI would not repeatedly intervene through spot-market operations, forward-book positions and reserve management to smooth volatility.
The scale of these interventions has become increasingly difficult to........