Full Text | 'Ironical that the Worst Performing Years For the Rupee are the Best For RBI in Terms of Trading Profit' |
In a conversation with The Wire’s founding editor M.K. Venu, eminent economist and former vice chancellor of Gokhale Institute of Politics and Economics Ajit Ranade says the RBI is creating a kind of a perverse incentive by selling dollars from the stock of foreign exchange, even as the rupee continues to fall.
Ranade says that around 40 billion dollar of FII money has left India in the last two years, while for the first time last year our BoP turned negative after a long time. Some estimates for this year 26-27 say it could go down to -75 billion dollars.
Below is the full text of their conversation, transcribed by Ipil Baski, an editorial intern at The Wire.
M.K. Venu: Hello and welcome to this special conversation on The Wire. And today we will talk about something which has caused a lot of anxiety to a lot of people, the government, business people, to generally all those who are involved in any economic activity, and it is the volatility that we have been seeing in the rupee exchange rate, especially post the US-Iran war. Not just volatility, the rupee that has been in a sort of freefall and it has caused a lot of anxiety to the RBI to the government, to business agents, to economic agents and people are still speculating as to where the rupee is going to end. It has been weakening pretty rapidly and not just post the US-Iran war, the Indian Rupee has been the worst performing currency even in 2025, it has been the worst performing probably among the worst performing currencies in 2026 so far and one may recall that the Economic Survey, a few months ago had explicitly mentioned that the Indian rupee was punching way below its weight. It spoke about a twin set of problems. One is the rupee was punching way below its weight and the flip side of it, chief economic adviser actually also said that that a special study needs to be done to understand why is foreign investment not coming into India or running away from India and of course, these trends have got exacerbated after the US-Iran war. So, to discuss this we have with us a very eminent economist who’s written a lot in recent weeks on the subject. Ajit Ranade, who is the former vice chancellor of Gokhale Institute of Politics and Economics and Ajit is the right person to talk to because besides his academic credentials, he also worked with the private sector, he was chief economist with the Birla Group for a long time. So, he understands how the other side also works, how businesses perceive the currency dynamics. So, welcome to our show Ajit, thanks for coming on a short notice.
Ajit Ranade: Thank you Venu for inviting me and your kind words of introduction.
MKV: Ajit, just to open the conversation, can you tell us, you wrote two recent columns, one in The Tribune and another one in another newspaper, where you particularly expressed some worry, anxiety over the way number one, the rupee was going and how you also spoke about RBI’s management of the currency and in particular you pointed out the fact that the weakening of the rupee since last year has caused RBI to make lot of profits because RBI has been selling dollars to defend the rupee. So, when the RBI’s reserves are about 70% in dollars and other hard currencies like Euro, etc. and in gold also. So, when all these assets were appreciating against the rupee, in the meanwhile when the RBI was selling dollars it was actually making profits, it was making essentially making profits out of a weakening rupee and RBI recently transferred a lot of those profits, in fact a huge number unprecedented, 2.8 lakh crore to the centre as dividend to actually plug its fiscal deficit. Now, you have commented on this on how a weakening rupee is making RBI earn profits and which is in turn being used to cover the fiscal gap and you have said that this is not a healthy practice. Can you explain this?
AR: Yeah. Venu, the thing is like this that the Reserve Bank of India is the monetary authority and is primarily responsible for conducting monetary policy and the fiscal policy is the responsibility of the government of India. So, typically fiscal policy is about budgets and taxation and revenues for the government, and monetary policy is about interest rates, exchange rate management, credit flows and stability of the financial sector. So, one thing that I was observing is that not just this year, but for the last few years, the surplus that is transferred from the RBI annually from the RBI, the monetary authority, to the Union government and remember that this money is not sharable, it’s not part of the divisible pool of taxes which are shared with the states, this goes to the Union government that has become a very significant part of the Union revenues. It’s close to 8% now and in fact it’s also reflected in the budget. So, in the beginning of the year when the finance minister presents the budget you find that item there. So, it’s almost become a standard practice. Now, by the way even if the rupee was, just for the sake of discussion we can say even if the rupee was depreciating, it does not automatically mean that the RBI has to make profits. It happens only when the RBI tries to defend a falling rupee. So, let’s say it keeps on defending. So, first of all, it accumulates dollars because it’s like I guess, like an insurance you need to have, dollars in case of certain flights. So, it buys dollars let’s say at 84 and it then sells hundred billion dollars out of its precious stock of foreign exchange at 94. So, the 10 rupee drop from 84 to 94 multiplied by 100 billion dollars is a, 1,000 billion rupees which is one lakh crore straight away. And since the rupee has been falling rapidly, plus the fact that the RBI has been selling these two together is generating profits and those profits are getting transferred to the Union government. So, it’s creating a kind of a perverse incentive as if that you keep selling dollars from the stock of foreign exchange, which by the way we have to have, it’s like a the dollar is an external currency for us we need to have a stock of foreign exchange to defend against certain stops and other liabilities but you’re selling 100 billion of that which is straight away becoming a fiscal resource, so that was a starting point. So, I was concerned that this number is actually in just last 3-4 years it’s just been going up and every year is a record high. This year is almost........