Since the rupee’s devaluation in 1991 was followed by a surge in India’s exports, economists have debated the benefits of a weaker rupee. How do you reflect on this debate?
The traditional view that exchange-rate depreciation improves export performance has long been overtaken by real-world developments. In 1994, I wrote a paper with [former RBI executive director] Sitikantha Pattanaik, showing that the pass-through of exchange rate changes into export prices is incomplete and declining in India. More recent work indicates that the sensitivity of merchandise exports to real exchange-rate changes has been decreasing over time.
India’s export performance during the 1990s and the first half of the 2000s occurred on the back of the global trade expansion. It was propelled by deepening globalisation, the end of the cold war, the creation of the WTO [World Trade Org-anisation] and the rise of East Asia.
The global trading environment is different now, with geo-economic fragmentation, muscular trade and industrial policies, reshoring of supply chains, and tariff and non-tariff barriers having weakened global demand and depressed global economic prospects.
Furthermore, India’s exports have been rising up the technology ladder and diversifying, rendering exchange-rate props less important than preserving and building market share. All that our exporters ask for is a stable exchange rate.
There are also concerns about a slowdown in global demand. Do you think this could limit the gains from a weaker rupee and amplify pressures instead?
You are right. Scale matters. As global trade slows, it will constrain the export efforts of all countries. It is heartening to note that India’s merchandise exports growth has exceeded that of the world’s in CAGR [compound annual growth rate] terms during 2018–25.
Moreover, India’s export comp-osition has undergone a structural shift, with services recording robust expansion. Currently, India is the seventh-largest exporter of services in the world. Given these tectonic changes, the exchange rate has a minor role to play in the evolution of the current account.
The other view is that a weaker rupee feeds into cost pressures and slows down output growth, making it undesirable.
Exchange rate pass-through into domestic prices has been declining over time, not just in India but globally too. There are also nuances or non-linearities involved that depend on underlying market conditions. While Apple would pass on an exchange-rate change completely, H&M or Zara would absorb some of it, preferring to protect market share.
India has an inelastic dependence on crude imports, but exports of petroleum products have acquired a rising profile. The same is true for smartphones and automobiles.
It is the skilling of the labour force and increasing its contribution to value added in manufacturing, building world-class infrastructure, assiduously nurturing overseas markets and the right mix of policies that provide the cutting edge to manufacturing rather than artificial props like a weaker exchange rate.
As we adapt to industrial revolution 4.0, the share of manufacturing in India’s gross value added of about 17–18% can go up to 25% if the average growth of manufacturing can be raised from about 7.5% now to about 12.5%. We will then be a global manufacturing powerhouse. Exchange-rate changes will have little to do with it.
In fact, I have not seen convincing evidence that a weaker exchange rate slows down output growth through higher imported input costs; if the import intensity of exports is less than one, depreciation can have beneficial effects on growth.
1 May 2026
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I have not seen convincing evidence that a weaker exchange rate slows down output growth through higher imported input costs
Many firms rely on foreign debt, which is costlier with a weaker rupee. Should this not amplify the risk of cost pressures for India’s investment cycle?
India is a country that runs a net negative international investment position, which means that its international liabilities exceed its assets. Accordingly, it is important that the exchange rate remains stable so that forex exposures are not exacerbated to crystallise as solvency risks. This is an important reason why exchange-rate management should eschew excessive volatility.
Also, India has a prudent external-debt management framework with ceilings on overall size, cost and end-use. Banks servicing firms that rely on external commercial borrowings are required to hedge currency risk arising there from.
Several free-market economists have argued that the rupee has been ‘over-parented’ and should be allowed to find its own level.
Milton Friedman, the winner of the 1976 Nobel Prize in Economic Sciences, was among the prominent free-market economists propounding the equilibrating properties of floating exchange rates. However, since the advent of floating exchange rates, the experience has been quite the opposite. Exchange-rate behaviour has been characterised by overshoots, self-fulfilling expectations, bandwagon effects, multiple disequilibria and several generations of currency crises.
Hence, all central banks monitor exchange rate movements closely and intervene in various ways to ensure orderly outcomes, because volatility can have real economy consequences as well as engender financial instability.
Increasingly, exchange rates have become hostage to capital flows that are highly vulnerable to spillovers from geopolitical uncertainties
If India manages to strengthen its current account, how much stability could it bring to the rupee in the long run?
Given India’s growth dynamics in which domestic savings pre-dominantly finances desired levels of investment and growth with foreign resources playing a supplemental role, I believe that the country currently enjoys a reasonably strong current-account position.
According to the IMF [International Monetary Fund], the sustainable current-account deficit norm for India is around 2% of GDP, which is in alignment with its growth performance. Work done in the RBI indicates that India can run a current account deficit of up to 2.5% of GDP, which is consistent with a viable net foreign-assets position and desired rates of growth.
How do we manage capital flows, which are more pro-cyclical than counter-cyclical and have become a major anchor for currency stability?
Increasingly, exchange rates have become hostage to capital flows, which are highly vulnerable to global spillovers from geopolitical events, trade and economic policy uncertainties caused by systemically important economies. Countries like India are bystanders, with no control over these developments.
While spillovers are global, the responsibility for macroeconomic and financial stability is national. Since the global financial crisis, the lack of a truly global, democratically accessible financial safety net has been acutely felt. For many emerging economies, national forex holdings are the only recourse, especially in the context of snapping the Gordian knot between global spillovers and fickle capital flows.
Accordingly, apart from seeking governance reforms in multilateral institutions, these countries have sought to reinforce their crisis management arsenal with buffers such as building forex reserves and using them to ensure forex markets are liquid and functioning normally.
The existence of these buffers has provided confidence to markets and discouraged speculative attacks on the exchange rate. In particularly adverse situations, these buffers can be supplemented with macroprudential instruments and capital flow measures.
