To worry or not? Rupee at 90 debate deepens as PM’s Economic Advisory Council member plays it down

The statement from a member of the Prime Minister's Economic Advisory Council (EAC-PM) regarding the rupee's weakness not being a concern, and linking it to phases of economic growth, offers a crucial insight into India's current economic policy thinking. This perspective challenges the traditional view that a depreciating currency is inherently a sign of economic distress, suggesting a nuanced approach where a weaker rupee can be seen as a tool for enhancing export competitiveness and fostering growth.

**Background Context:** The Indian Rupee, like many emerging market currencies, has faced significant pressure over recent years, particularly due to global headwinds. Factors such as aggressive interest rate hikes by the US Federal Reserve, elevated crude oil prices (India being a major oil importer), and outflows of Foreign Institutional Investments (FIIs) from emerging markets have contributed to its depreciation. A weaker rupee typically raises concerns about imported inflation (as imports become more expensive), higher current account deficit, and increased foreign debt servicing costs. However, it also makes Indian exports cheaper and more attractive in global markets, potentially boosting export volumes and supporting domestic industries.

**What Happened:** The EAC-PM member's statement highlights a school of thought that views currency depreciation not merely as a problem but potentially as a natural outcome or even a beneficial factor during certain economic growth phases. The argument is that as an economy grows, demand for imports might increase, and if exports don't keep pace, the currency might naturally weaken. Furthermore, a managed depreciation can provide a competitive edge to exporters, which is crucial for a country like India aiming to boost its manufacturing and export capabilities under initiatives like 'Make in India' and 'Atmanirbhar Bharat'. This perspective suggests that policymakers might be comfortable with a certain level of currency depreciation, as long as it doesn't lead to uncontrolled volatility or hyperinflation.

**Key Stakeholders Involved:**

* **Prime Minister's Economic Advisory Council (EAC-PM):** This independent body advises the Prime Minister on economic matters. Its views often reflect the government's broader economic philosophy and priorities. By downplaying rupee weakness, it signals the government's comfort with the current trajectory, balancing growth ambitions with currency stability.

* **Reserve Bank of India (RBI):** As the central bank, RBI is the primary custodian of India's monetary policy and currency management. Its mandate, primarily enshrined in the **RBI Act, 1934**, includes maintaining price stability (inflation targeting) and ensuring financial stability. The RBI actively intervenes in the foreign exchange market to manage sharp movements in the rupee, typically by selling US dollars from its foreign exchange reserves to arrest rapid depreciation, or buying dollars to prevent excessive appreciation. This 'managed float' regime aims to smooth volatility rather than target a specific exchange rate.

* **Ministry of Finance/Government of India:** The government sets the overall fiscal and trade policy. Its aggressive pursuit of trade talks, including Free Trade Agreements (FTAs) with various countries, aims to enhance market access for Indian goods, diversify export markets, and attract foreign investment. This long-term strategy complements the short-term currency management efforts by addressing structural issues in India's trade balance.

* **Exporters and Importers:** Exporters generally benefit from a weaker rupee as their goods become cheaper for foreign buyers, potentially increasing demand and profitability. Importers, conversely, face higher costs, which can impact profitability or lead to higher consumer prices for imported goods.

**Why This Matters for India:** This debate is crucial for understanding India's economic strategy. It indicates a readiness to leverage the exchange rate as a tool for growth, particularly for export promotion, rather than solely focusing on maintaining a strong rupee at all costs. For India, a sustained export push is vital for job creation, industrial growth, and reducing its reliance on imports. However, this approach must be carefully balanced to prevent inflationary pressures, especially given India's significant import basket, including crude oil, which directly impacts energy and transportation costs. The government's emphasis on national interest in trade negotiations underscores its commitment to securing favorable terms that benefit domestic industries and reduce trade deficits, thereby contributing to long-term currency stability.

**Historical Context:** India has a history of currency volatility, notably the 1991 Balance of Payments crisis which led to significant economic reforms and a shift from a fixed exchange rate regime to a managed float. Lessons from this period instilled a strong emphasis on maintaining adequate foreign exchange reserves to cushion against external shocks. The current approach, while acknowledging the growth benefits of depreciation, still relies on the RBI's robust intervention capabilities to prevent a free fall, unlike the crises of the past. The **Foreign Exchange Management Act (FEMA), 1999**, which replaced the more stringent FERA, reflects India's journey towards a more liberalized capital account and a managed exchange rate policy.

**Future Implications:** The rupee's future trajectory will be influenced by a confluence of global and domestic factors. Global crude oil prices, the pace of interest rate hikes by major central banks, and FII sentiment towards emerging markets will continue to play a significant role. Domestically, India's ability to boost manufacturing, increase exports, and attract stable foreign direct investment (FDI) will be critical. The success of ongoing trade talks and the implementation of policies like the Production Linked Incentive (PLI) schemes aimed at making India a global manufacturing hub will be key determinants. If India can significantly improve its export performance and reduce its current account deficit, it would lend fundamental strength to the rupee, potentially allowing for less reliance on RBI intervention. Conversely, failure to manage trade imbalances or significant global shocks could deepen the depreciation, testing the government's comfort level and the RBI's intervention capacity.

**Related Constitutional Articles, Acts, or Policies:** While no specific constitutional article directly dictates the rupee's value, the overall economic policy framework operates within the constitutional scheme. The **RBI Act, 1934** empowers the RBI to manage currency and credit. The **Foreign Exchange Management Act (FEMA), 1999**, provides the legal framework for foreign exchange transactions. The government's trade policy is articulated through various **Foreign Trade Policies** (e.g., FTP 2023) and bilateral/multilateral trade agreements. The **Monetary Policy Framework Agreement** between the Government of India and the RBI (signed in 2015) formalizes the inflation targeting mandate, which indirectly influences currency management decisions.