By R. Suryamurthy
The Indian rupee’s slide past 90 to the U.S. dollar has pushed the Reserve Bank of India into one of its most complex monetary-policy dilemmas in years, just as the central bank’s three-day MPC meeting gets underway.
The currency weakened to a record 90.14 on Wednesday, extending its losses to nearly 5% this year and cementing its position as Asia’s worst performer, even as the domestic economy delivers 8%-plus GDP growth and inflation sinks to a decadal low.
Traders say the RBI has intervened only in short, staggered bursts in recent sessions, allowing the psychologically significant 90-mark to be breached without a forceful defence.
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That has fed expectations that the central bank, traditionally focused on managing volatility rather than defending levels, may now be tolerating a weaker exchange rate to reflect worsening external balances and persistent capital outflows.
But the timing could not be more awkward: with the MPC set to announce its policy decision on December 5, the rupee’s fall has sharply narrowed the space for a widely anticipated 25-basis-point rate cut.
The contradiction is striking. Inflation has collapsed to just 0.3% in October, supported by GST rationalisation, deflation in vegetables and pulses, and unusually benign core inflation once precious metals are stripped out, according to the CareEdge policy preview.
Growth, meanwhile, has accelerated to 8.2% in Q2, buoyed by a low base, a very soft GDP deflator, front-loaded exports and a brief consumption lift from the early festive season. Liquidity conditions are also flush, with banking-system surplus rising to ₹1.8 trillion in November following CRR cuts, VRR operations and RBI’s OMO purchases.
On paper, these conditions give the central bank its cleanest opportunity in months to deliver one final rate reduction — especially as real policy rates remain above the RBI’s estimated neutral band. Several economists, including those at CareEdge, argue that inflation will remain below 4% for at least two more quarters, and that growth is likely to cool to around 7% in the second half of the year, making the case for a modest easing move rather than a prolonged pause.
Yet the external environment is pulling the RBI in the opposite direction. Foreign portfolio investors have withdrawn billions from equities this year, with November alone seeing net outflows despite U.S. Fed rate cuts.
CRISIL’s assessment of the external accounts shows that the narrowing of the current account deficit in Q2 was flattered by weaker imports rather than export strength, while services exports, though resilient, are not fully offsetting soft merchandise flows and the loss of price competitiveness from punitive U.S. tariffs that remain locked at 50%.
Trade deficits have swollen again, crossing $40 billion in October, and gold imports have climbed, adding a fresh layer of pressure to dollar demand. The rupee’s 1.6% depreciation over the past month — driven by tariff uncertainty, a delayed India–US trade agreement, and fading FPI appetite — has persisted despite record foreign-exchange reserves of $693 billion.
According to the CareEdge report, the rupee remains undervalued on a REER basis and could strengthen next year if global conditions turn more favourable, but that offers little comfort for policymakers forced to navigate the near-term sell-off.
For the RBI, the risk is that cutting rates into a falling currency could spark a more disorderly depreciation by emboldening speculative positions, feeding fears of policy complacency and worsening imported inflation just as India enters a period of heavy energy and electronics demand.
Analytically, even a 20–30 basis point bump in imported inflation — a realistic outcome of a weaker currency — would complicate the clean disinflation narrative the RBI has built over the year.
Bond markets may cheer a cut, but equity markets have already signalled discomfort, and FPIs could treat an easing move as an exit cue rather than an investment trigger. SBI Research’s own pre-policy assessment hints that the central bank may ultimately choose to speak dovishly while holding rates steady, essentially buying time to assess how global conditions evolve after the U.S. Federal Reserve’s December 10 decision.
Complicating matters further is the behavioural shift triggered by the breach of 90. Importers are front-loading dollar purchases, exporters are withholding conversions in anticipation of better rates, hedging costs have widened, and traders warn that without visible RBI comfort, levels like 91 could be tested within weeks.
Bank of Baroda’s Madan Sabnavis argues that sentiment, rather than fundamentals, has begun driving the rupee, and that the RBI’s restraint has inadvertently amplified the one-way market psychology.
That sentiment risk matters because the currency’s fall is occurring not at a time of domestic weakness, but at a moment when India’s macro fundamentals — strong growth, low inflation, high reserves — should ordinarily be anchoring capital.
The broader unease is that India’s external vulnerability has deepened even as domestic indicators improve. With input tariffs elevated, regulatory unpredictability growing through QCOs and import restrictions, and logistical frictions still raising production costs, the Indian export engine has not responded to depreciation the way classical models suggest it should.
Despite a 50% fall in the rupee over a decade, export growth has lagged global trade expansion, and the textbook competitiveness boost that depreciation is supposed to deliver has repeatedly been blunted by structural cost burdens.
In that sense, the rupee’s fall to 90 is less a crisis trigger than an uncomfortable mirror: a reminder that strong growth does not automatically guarantee capital confidence, and that monetary policy alone cannot repair the domestic frictions and external uncertainties now bearing down on the currency.
As the MPC meets, the central bank finds itself trapped between two unattractive choices — cut rates and risk accelerating the rupee’s decline, or hold rates and risk stalling the recovery in financial conditions it has worked to stabilise.
Whatever the decision, the RBI knows the stakes have shifted. This is no longer a technical policy call shaped by models and forecasts; it is a credibility decision taken under the glare of a currency struggling to find a bottom.
This report is from 5Wh news service. NewsGram holds no responsibility for its content.
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