3 min readApr 4, 2026 06:37 AM IST
First published on: Apr 4, 2026 at 06:35 AM IST
By Aashi Gupta
The rupee hitting record lows has drawn renewed attention. From 45.9 per US dollar in January 2010 to over 95 in March 2026, it has depreciated at an average annual rate of 4.6 per cent over the past 16 years. India runs a goods trade deficit, relies heavily on imported energy, and depends on capital inflows to finance this gap. Over time, these structural features tend to be reflected in the exchange rate. While the drivers of a currency’s movement are well understood, the manner in which this adjustment takes place warrants closer attention. In Brazil or South Africa, currency pressure has been accompanied by tighter monetary policy, often at the cost of demand. In contrast, there are countries in East Asia where sustained exports have helped reduce external imbalances.
India’s experience has been different. The rupee has been allowed to adjust, but in a gradual manner. The central bank has intervened to contain volatility, without targeting any specific exchange rate level. But the scale of external pressure on the rupee is too large to be offset through intervention alone. Since 2022, there have been phases where the central bank has been a net seller of dollars. Over the same period, the rupee has continued to weaken. The coexistence of sustained dollar sales and a depreciating exchange rate underscores a constraint: Intervention can smoothen volatility and influence the pace of adjustment, but it cannot offset persistent and large external imbalances.
Movements in the rupee track closely the combined behaviour of oil prices and capital flows. The sharp increase in Brent crude from around $70 per barrel in early 2021 to over $116 by mid-2022 translated into a higher import bill. Capital flows turned volatile, with visible episodes of net outflows. Tensions in West Asia have pushed oil prices up, reinforcing these pressures. Thus, pressure on the rupee has been persistent and multi-sided. Elevated oil prices have structurally increased India’s external financing requirement, while the volatility of capital flows has made that requirement harder to meet on stable terms. In such a setting, the exchange rate becomes the primary margin of adjustment.
This supports near-term stability but leaves the underlying sources of external imbalance largely unchanged. The merchandise trade deficit has doubled to $27.1 billion in February 2026 from $14.4 billion in February 2025. Capital flows remain volatile, with net FDI turning negative due to high repatriation, while portfolio outflows dominate. Energy dependence remains elevated. Export concentration persists, with a limited set of products and markets accounting for a large share. The question is whether the economy should continue to depend on the exchange rate as the balancing variable. A more durable adjustment would come from gradual but sustained structural changes in trade and production. This would include a boost to manufacturing, greater export diversification, a rebalancing of capital inflows toward more stable FDI, and a reduction in energy dependence through domestic production, renewables, and efficiency improvements.
The writer is associate fellow, CSEP. Views are personal
