There is a seductive clarity to economist and 16th Finance Commission of India chairman Arvind Panagariya’s argument. If markets want the rupee weaker, let it fall. Don’t waste precious foreign exchange reserves defending a number—even a psychologically charged one like 100 to the dollar.

Currencies are shock absorbers. The Reserve Bank of India (RBI) should stop treating the exchange rate as a matter of national honour and start treating it as a macroeconomic instrument. The argument is clean. It is intellectually respectable. It draws on decades of mainstream economics and the endorsement of figures like Gita Gopinath, who has consistently urged emerging-market central banks to hold their fire rather than burn reserves defending arbitrary thresholds.

In a narrow technical sense, it is not wrong. But it is dangerously incomplete. And understanding why reveals something important not just about India’s currency dilemma, but about the radically altered world in which that dilemma is being debated.

Since the West Asian crisis intensified and crude oil prices surged, the RBI has mounted one of its most aggressive currency-defence operations in recent years. The rupee, which was trading around 93.98 to the dollar in March, briefly touched an all-time low of 96.96 on May 20 before intervention pulled it back toward the 96 range.

Market estimates suggest the RBI has been intermittently selling between $800 million and $2 billion daily through spot and forward market operations to curb volatility. India’s foreign exchange reserves, which had touched a record $728.49 billion in late February, fell sharply as intervention intensified, dropping to $698.49 billion by April 24 and further to $690.69 billion by early May, before recovering modestly to $696.99 billion in the week ended May 8 after a rise in gold reserves. The central bank has also announced a $5 billion dollar-rupee buy-and-sell swap auction scheduled for May 26 to manage liquidity pressures arising from sustained intervention.

This scale of defensive action has revived a question that periodically surfaces in Indian policy circles: is the RBI right to resist or is it simply delaying an inevitable and necessary adjustment? The pro-depreciation camp rests heavily, if implicitly, on the China precedent.

Beijing maintained a deliberately undervalued renminbi during the 1990s and 2000s. Cheap exports flooded global markets. Manufacturing scaled at extraordinary speed. The strategy worked, spectacularly, by almost every measure. But this is historical reasoning applied to a fundamentally different situation, in a fundamentally different era.

China weaponised currency weakness after it had already become a manufacturing colossus deeply embedded in global supply chains. It had massive domestic manufacturing ecosystems, local component production, integrated industrial clusters, and enormous economies of scale. By the time its export machine was running at full power, China had built the industrial depth to absorb and exploit a weak currency. It produced what it sold. It imported relatively little compared to the scale of what it exported.

India’s economic architecture looks almost nothing like that. Many Indian sectors are, in reality, assembly economies rather than fully localised manufacturing ecosystems. The country imports nearly 89 per cent of its crude oil. Its electronics industry depends heavily on chips and components sourced from abroad. Renewable energy manufacturing relies on solar wafers and battery cells that must be bought overseas. Pharmaceutical exports, one of India’s genuine manufacturing success stories, remain substantially dependent on imported active pharmaceutical ingredients. Even the emerging electric-vehicle supply chain runs on imported lithium and battery materials.

What this means in practice is brutal and immediate. A rupee at 100 to the dollar, compared to 83, raises the price of an $80 barrel of crude from roughly Rs 6,640 to Rs 8,000. That difference does not stay neatly inside an energy ministry spreadsheet. It bleeds into petrol and diesel prices, into freight costs, into fertiliser subsidies, into food inflation, into the aviation sector, into the disposable income of every urban household buying groceries or commuting to work.

And it does not stop there. External debt-servicing costs rise in rupee terms, placing additional pressure on both government finances and corporate balance sheets that borrowed in dollars. India cannot offset these pressures through merchandise trade surpluses the way China did. The arithmetic simply does not work.

This is the crucial distinction that the RBI’s intervention strategy implicitly embodies, and that the public debate frequently loses sight of. The challenge for India is not depreciation as such. Moderate depreciation over time is not only acceptable but mathematically expected for a developing economy running higher inflation than its trading partners. The rupee will be weaker in 2035 than it is today, and that is entirely manageable. The challenge is steep and disorderly depreciation, the kind that transmits imported inflation rapidly through fuel, fertilisers, freight and industrial inputs before the economy has any time to adjust. It is the speed and unpredictability of the slide, not the direction, that the RBI is actually fighting.

Seen in that light, daily interventions of up to $2 billion are not stubbornness or a defence of a symbolic number. They are a calculated attempt to buy time for orderly adjustment while preventing the kind of currency crisis that can rapidly become self-fulfilling, as capital flight accelerates, import costs spike, and inflation expectations become unanchored.

This is also where the depreciation argument faces its most fundamental challenge, one that goes beyond inflation vulnerability into the mechanics of how modern global trade actually operates. The old textbook model assumed a simple sequence: devalue the currency, exports become cheaper, global buyers purchase more, export revenues surge. That model had reasonable predictive power in earlier manufacturing eras when countries produced most of their industrial inputs domestically. It describes a world that no longer exists for economies like India.

Consider a representative Indian electronics exporter. At 83 rupees to the dollar, a product sold for $100 generates Rs 8,300 in revenue. At 100 rupees, the same product generates Rs 10,000. On paper, that looks like an extraordinary windfall, nearly a 20 per cent revenue boost without changing a single unit of output. But look at the cost side of the same ledger. The chips, display panels, sensors, and industrial machinery required to make that product are priced in dollars. When the rupee weakens by 20 per cent, those input costs rise by roughly the same proportion. Freight costs rise. Energy costs rise. If imported inflation flows through into broader price levels, financing costs eventually rise too. The net margin gain that looked transformative on the revenue line can shrink to almost nothing or disappear entirely.

This is not an abstract theoretical problem. It is the lived reality of Indian exporters across sectors from electronics to chemicals to engineering goods. They earn more rupees per dollar, but they spend more rupees on every dollar-denominated input. The currency gain is partially, sometimes largely, self-cancelling.

Economist Ashwani Mahajan of the Swadeshi Jagran Manch (SJM) has made this point forcefully, arguing that the conventional assumption that depreciation automatically boosts exports fails to account adequately for the import dependence embedded within Indian manufacturing itself. When the rupee weakens, he notes, exporters may earn more rupees per dollar, but their production costs also rise sharply due to costlier imports, diluting whatever competitive advantage depreciation was supposed to create.

Even where Indian exporters do retain some competitive advantage from depreciation, there is a second mechanism that erodes it: global buyers are not passive recipients of currency windfalls. The theoretical model assumes foreign buyers continue paying the same dollar price while exporters quietly pocket the higher local-currency conversion. Real-world procurement does not work that way. Large global buyers, from Walmart and Amazon to IKEA and automotive original equipment manufacturers, have sophisticated sourcing operations that track currency movements in real time. When the rupee weakens substantially, they know exactly what that means for their Indian suppliers’ cost structures. And they negotiate accordingly.

An Indian textile exporter selling shirts at $10 per unit, watching the rupee move from 83 to 97, might expect to convert the same dollar revenue into considerably more rupees than before. But the buyer’s sourcing team has run the same calculation. The conversation that follows is predictable: reduce your price, or we shift volume to Vietnam, Bangladesh or Cambodia. Share the currency benefit or lose the order entirely.

This dynamic is pervasive in global trade and is one reason economists speak of exchange-rate pass-through, meaning the degree to which currency changes translate into actual price shifts. In highly competitive, low-margin export categories, which describe a substantial portion of India’s goods export base, pass-through to buyers is significant. The exporter does not capture the full theoretical gain. The foreign buyer captures a meaningful share through renegotiation.

There is a partial exception worth noting, India’s services exports, particularly IT and software, behave differently. When a software company earns a million dollars and the rupee weakens, its rupee revenues rise sharply while its costs, predominantly rupee-denominated salaries, do not adjust immediately. Pricing contracts are sticky, imports are minimal, and the currency gain flows more directly to the bottom line. But India cannot build a macroeconomic development strategy around IT exports alone. The manufacturing depth required to absorb tens of millions of workers into productive employment cannot come from software services.

There is also a timing problem embedded in the depreciation thesis that its proponents tend to understate. Economists describe the J-curve effect, the phenomenon whereby a currency depreciation initially worsens a country’s trade balance before improving it. Import costs rise immediately because existing contracts reprice at once and import volumes are inelastic in the short run. Export volumes, by contrast, adjust slowly, as new orders are won and production is ramped up.

For India, with its enormous crude oil import bill, this initial deterioration can be severe. The trade deficit widens before it narrows. Foreign exchange pressure intensifies before it eases. And in the interval, the inflationary consequences of more expensive oil, transport, electricity, logistics and fertiliser begin working through the domestic economy. Wages eventually follow prices upward. Borrowing costs rise as the central bank responds to inflation. When wages and costs have risen sufficiently, the initial export price advantage that depreciation was supposed to create has been eroded from the supply side.

Mahajan adds a further dimension that mainstream commentary tends to overlook. Indian manufacturers are already competing at a structural disadvantage, facing higher electricity costs, elevated logistics expenses, expensive financing, and infrastructure burdens over which they have little control. Against this, countries like China aggressively support their exporters through state subsidies and supply-chain dominance. To then prescribe a weaker rupee as the remedy for Indian industry’s competitiveness problems, Mahajan argues, is to misdiagnose the patient entirely. The problem is not that the rupee is too strong. The problem is that the foundations of industrial competitiveness have not yet been adequately built.

This connects directly to a structural issue that sits beneath the entire exchange-rate debate. India is not an export-led economy and shows no near-term prospect of becoming one. Exports of goods and services represent roughly one-fifth of GDP, significant, but nowhere near the ratios that defined East Asia’s growth models. India’s economic engine runs on domestic demand. Urban consumption, services, and the spending power of a growing middle class are what keep GDP expanding.

A sharply weaker rupee effectively taxes that middle class. Imported electronics become more expensive. Overseas university education becomes dramatically costlier. Fuel inflation eats into disposable income. The inflationary wave that follows currency weakness compresses the very consumption sustaining growth. China could tolerate lower household consumption because its model was investment- and export-led. India’s model does not work that way. Household consumption is not the residual. It is the engine.

Beyond India’s structural vulnerabilities lies a broader shift in global conditions that makes the China-era playbook obsolete for any country attempting to follow it now. China rose during the high summer of hyper-globalisation: tariffs were falling, supply chains were integrating across borders with near-religious fervour, and global trade was expanding year after year.

The world of 2026 operates on entirely different logic. Industrial subsidies, localisation mandates, sanctions regimes, and the reshaping of supply chains along geopolitical lines now define the terrain. In this environment, manufacturing competitiveness depends less on currency levels and more on technological capability, logistics reliability, supply-chain resilience, and the credibility of the regulatory environment. A cheaper rupee does not automatically attract a semiconductor fabrication plant or a defence supply-chain relocation.

This is why the RBI’s intervention deserves to be read as strategic calculation rather than bureaucratic inertia. India is simultaneously trying to attract sovereign wealth fund capital, long-term manufacturing investors, and pension-fund infrastructure flows, all of which price currency volatility into their return expectations. India has also been quietly pushing for greater rupee internationalisation, settling more trade in rupees and expanding its regional currency footprint. That ambition is built on credibility and stability, not on perceptions of structural weakness. Every episode of disorderly depreciation is a withdrawal from that account of long-term currency credibility that India is still in the early stages of building.

The real question, then, is not whether the RBI should defend the rupee. It is what that defence is ultimately buying time for. Burning reserves to hold a line makes strategic sense only if the interval is used to reduce the import dependence, build the domestic supply chains, and develop the industrial ecosystems that would eventually make the rupee genuinely strong rather than merely propped up. Currency weakness works best when a country already has industrial dominance, controls supply chains, imports relatively little, and exports high volumes of domestically created value. China in the 2000s fit that model. India in 2026 is still building toward it.

Using depreciation as a development strategy at this point in the cycle, in this global environment, with this economic structure, and without first solving the import-dependence problem that makes depreciation self-defeating, is not a bold application of a proven theory. It is a category error dressed in the language of macroeconomic sophistication.

The RBI has shifted into an active rupee-defence mode, but its strategy is not to defend any fixed exchange rate. Instead, the central bank is trying to prevent a disorderly slide through aggressive dollar sales, tactical intervention in spot and forward markets, surprise pre-market operations to deter speculation, and a planned $5 billion dollar-rupee swap auction to restore banking liquidity drained by forex intervention.

Policymakers are also weighing measures to attract capital inflows, including special NRI deposit schemes and easing conditions for foreign investors. Crucially, the RBI is resisting rate hikes purely to defend the rupee, believing the current pressure stems from external geopolitical and crude oil shocks rather than domestic macroeconomic weakness. The RBI’s message is clear: gradual depreciation may be tolerated but a sharp, panic-driven fall in the rupee will not be allowed.

The RBI spent billions in recent weeks defending a currency level that some economists insist is just a number. The billions are real. The consequences of getting this wrong are real. And the window for building the industrial foundations that would make such defence unnecessary in the future is narrowing faster than the debate acknowledges.

Subscribe to India Today Magazine

Source: India Today