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29 Dec 2025·Source: The Indian Express
3 min
EconomyEDITORIAL

RBI's Rupee Policy: Avoid Past Mistakes for Export Competitiveness

RBI's rupee management needs reform; past interventions led to real appreciation, hurting exports.

RBI's Rupee Policy: Avoid Past Mistakes for Export Competitiveness

Photo by Ishant Mishra

संपादकीय विश्लेषण

The RBI's rupee management policy, particularly its interventions to prevent appreciation, has been counterproductive, leading to a real appreciation of the rupee and hurting India's export competitiveness. A more flexible exchange rate policy is needed.

मुख्य तर्क:

  1. The RBI's strategy of accumulating forex reserves to prevent rupee appreciation has inadvertently led to a real appreciation of the rupee, as measured by the Real Effective Exchange Rate (REER).
  2. This real appreciation has made Indian exports less competitive in global markets and imports cheaper, contributing to a widening trade deficit and hindering export-led growth.
  3. The RBI's interventions are costly, as they require sterilization of the injected rupee liquidity, which can lead to higher domestic interest rates and impose a fiscal burden on the government.
  4. The current policy approach is a repeat of past mistakes, such as those observed between 2005-08, where similar interventions led to negative consequences for the economy and export sector.
  5. A more flexible exchange rate policy, allowing for both appreciation and depreciation based on market fundamentals, would better serve India's economic interests by promoting export growth and managing capital flows efficiently.

प्रतितर्क:

  1. The RBI's stated objective is to manage volatility and build reserves for external stability, not to target a specific exchange rate. However, the authors argue that this approach has had unintended negative consequences for competitiveness.

निष्कर्ष

The RBI should adopt a more flexible and market-determined exchange rate policy, allowing the rupee to adjust to economic fundamentals, rather than costly interventions that lead to real appreciation and hurt competitiveness.

नीतिगत निहितार्थ

A shift in RBI's exchange rate management strategy towards greater flexibility and less intervention is recommended to enhance India's export competitiveness and ensure more efficient capital allocation.

Here's the key point: The Reserve Bank of India's (RBI) rupee management policy, particularly its interventions to prevent depreciation, has inadvertently led to a 'real appreciation' of the rupee, harming India's export competitiveness. The surprising fact is that despite the RBI's efforts to stabilize the rupee, India's Real Effective Exchange Rate (REER) has remained above 100, indicating that the rupee is overvalued compared to its trading partners. Think of it like trying to hold a beach ball underwater; the effort is costly, and the ball eventually resurfaces.

For a UPSC aspirant, understanding exchange rate management is fundamental for GS3 Economy, as it directly impacts trade, inflation, and capital flows. This topic is frequently asked in Mains, especially regarding RBI's role. Before, the RBI's interventions were seen as necessary for stability, but now, there's a growing argument that they are counterproductive for long-term export growth.

मुख्य तथ्य

1.

RBI's interventions to prevent rupee depreciation have led to real appreciation.

2.

Real Effective Exchange Rate (REER) above 100 indicates overvaluation.

3.

India's export competitiveness has been negatively impacted.

4.

RBI's forex interventions require sterilization, which can increase interest rates.

UPSC परीक्षा के दृष्टिकोण

1.

RBI's monetary policy and exchange rate management tools (e.g., intervention, sterilization).

2.

Concepts of Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER).

3.

Impact of exchange rate policy on Balance of Payments (BoP), trade, and inflation.

4.

Trade-offs between exchange rate stability, export competitiveness, and capital account management.

5.

Role of exchange rate in achieving 'Make in India' and export-led growth objectives.

दृश्य सामग्री

India's External Sector Snapshot (as of December 2025)

This dashboard provides key current statistics related to India's external sector, highlighting the context of RBI's exchange rate management and its impact on trade and reserves.

Forex Reserves
~$670 Billion+8% (YoY est.)

A robust level of foreign exchange reserves provides a crucial buffer against external shocks and allows RBI to intervene in the forex market to manage rupee volatility. However, continuous accumulation through intervention can contribute to real appreciation.

Merchandise Exports (FY25 Est.)
~$470 Billion+4% (YoY est.)

Despite global headwinds and rupee overvaluation, India aims for higher export growth. The current policy debate centers on whether RBI's rupee management is hindering this growth by making exports less competitive.

Services Exports (FY25 Est.)
~$370 Billion+9% (YoY est.)

India's services exports remain a strong pillar of its external sector, often offsetting merchandise trade deficits. This sector is relatively less sensitive to REER fluctuations compared to goods.

Current Account Deficit (CAD) (FY25 Est.)
~1.5% of GDPStable

A manageable CAD is vital for external stability. While merchandise trade faces challenges, strong services exports and remittances help keep the CAD in check, reducing pressure on the rupee.

और जानकारी

पृष्ठभूमि

India transitioned from a fixed exchange rate regime to a managed float system in the early 1990s. The Reserve Bank of India (RBI) has historically intervened in the foreign exchange market to manage volatility, prevent sharp depreciation or appreciation, and build foreign exchange reserves. This approach was largely aimed at maintaining macroeconomic stability and insulating the economy from external shocks.

नवीनतम घटनाक्रम

The recent debate highlights that RBI's interventions, particularly its efforts to prevent rupee depreciation by buying foreign currency, have inadvertently led to a 'real appreciation' of the rupee. This occurs when the nominal exchange rate remains relatively stable, but domestic inflation is higher than that of trading partners. The Real Effective Exchange Rate (REER) remaining above 100 indicates that the rupee is overvalued, making Indian exports more expensive and imports cheaper, thereby harming India's export competitiveness and potentially widening the current account deficit.

बहुविकल्पीय प्रश्न (MCQ)

1. Consider the following statements regarding exchange rates and their implications for trade: 1. Nominal Effective Exchange Rate (NEER) measures the weighted average of a country's currency against a basket of foreign currencies, without accounting for inflation. 2. Real Effective Exchange Rate (REER) adjusts NEER for inflation differentials between the home country and its trading partners. 3. A REER value consistently above 100 generally indicates that the domestic currency is undervalued, which tends to boost exports. Which of the statements given above is/are correct?

उत्तर देखें

सही उत्तर: A

Statement 1 is correct: NEER is a weighted average of bilateral nominal exchange rates. Statement 2 is correct: REER is NEER adjusted for inflation differentials, providing a better measure of a currency's international competitiveness. Statement 3 is incorrect: A REER value consistently above 100 indicates that the domestic currency is *overvalued*, making exports more expensive and imports cheaper, thus harming export competitiveness. An undervalued currency (REER below 100) would typically boost exports.

2. In the context of the Reserve Bank of India's (RBI) exchange rate management, consider the following statements: 1. RBI typically intervenes in the foreign exchange market by buying foreign currency to prevent excessive depreciation of the Rupee. 2. Such interventions, if unsterilized, can lead to an increase in domestic money supply and potentially inflationary pressures. 3. Sterilization operations involve the RBI selling government securities in the domestic market to absorb excess liquidity created by foreign exchange interventions. Which of the statements given above is/are correct?

उत्तर देखें

सही उत्तर: D

Statement 1 is correct: When the RBI buys foreign currency (e.g., dollars), it injects rupees into the market, which helps prevent the rupee from depreciating too much. Statement 2 is correct: If the rupees injected during foreign currency purchases are not withdrawn, it increases the money supply, which can fuel inflation. Statement 3 is correct: Sterilization is the process by which the central bank counteracts the impact of its foreign exchange operations on the domestic money supply. Selling government securities absorbs liquidity from the market, thus sterilizing the impact of foreign currency purchases.

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