But this year has been particularly challenging for Indian policymakers, with the rupee depreciating sharply following the outbreak of the war in West Asia.

Currently, it is hovering around 96 to a US dollar.

Union Finance Minister Nirmala Sitharaman, in a written reply in Rajya Sabha, said that the value of the Indian currency against the US dollar is market-determined. "The government closely tracks the trends in key economic parameters, including exchange rate movements, along with their implications for economic growth and fiscal stability. These issues are discussed at various fora at various levels of the government," she said.

Factors That Drive Rupee

The main factors that have been influencing the value of the market-driven Indian currency are crude oil prices, trade deficit, foreign investment (portfolio as well as Foreign Direct Investment [FDI]), remittances, interest rates, the Reserve Bank of India’s (RBI) policies, inflation, movement of the US Dollar Index and geopolitical developments.

But the underlying reason is the Indian economy.

“If India does well, the rupee will strengthen,” said Montek Singh Ahluwalia, former Deputy Chairman, Planning Commission.

Ahluwalia, who held several key positions in the Manmohan Singh government, said as the value of the rupee is determined by market forces, it can weaken if India is not seen to be adequately handling its problems. “Whatever they [politicians] may be saying, if the economy were strong, the rupee would be strong, and that would be the best signal that the economy is strong,” Ahluwalia said while talking to The Secretariat.

Sounding a word of caution, Ahluwalia said attempts by policymakers to artificially strengthen the value of the rupee could weaken the economy. “If the economy for some reason is weak, either for internal or external reasons, and as a consequence, the rupee is weakened, (and if we feel) that we are benefited by strengthening it artificially, we are not. If you try to strengthen it artificially, the economy will become weaker,” he said.

If you try to strengthen it [rupee] artificially, the economy will become weaker

- Montek Singh Ahluwalia, former Deputy Chairman, Planning Commission

Ahluwalia noted that the RBI has done a good job in managing the rupee. “The whole problem with exchange rate management is you always have speculative pressure on the rupee. And it's a matter of judgment whether you want to call the bluff of the speculators or let them ride a bit,” the noted economist said.

Ahluwalia said that the RBI is “the biggest speculator on the block” and stressed that the central bank has to use its muscle to prevent “somebody… (from) artificially trying to sink the rupee.”

RBI's Policy

The RBI’s stated policy is to curb excessive speculation in the forex market and not to push the value of the rupee towards any pre-determined target.

RBI Governor Sanjay Malhotra, in a post-monetary policy press conference, had said: “We don't target any price levels or any bands (for rupee). We allow the markets to determine the prices. We believe that markets, especially in the long run, are very efficient. It's a very deep market.”

On another occasion, Malhotra had said, “It is only abnormal and high volatility that we try to curb, so as to have an orderly movement in the forex market.”

In addition to directly intervening in the forex market, the measures being adopted by the RBI to check the slide of the rupee include interest rate hikes, currency swap arrangements for oil-importing firms, easier capital flow norms, and higher rates on Foreign Currency Non-Resident (FCNR) deposits.

What Rupee Fall Means

Observing that the rupee depreciation was largely expected amid rising energy prices and capital flows shifting toward safe-haven assets such as the US dollar, a recent CareEdge Ratings report said the weakness in the Indian rupee has been a more persistent concern over the past year, even before the West Asia conflict.

“Weak capital flows in the last year have been a major factor behind the weakening pressure on the rupee. The recent escalation in tensions in West Asia has only intensified these downward pressures. The persistent weakness in the rupee is evident from its ~11% depreciation over the past year, of which 4.7% occurred since the war started,” the report added.

Depreciation, it added, is particularly large for currencies such as the Philippine Peso, Indian Rupee, South African Rand, Thai Baht, Korean Won, and Indonesian Rupiah, as these economies are highly dependent on West Asia for energy imports.

Mixed Bag For Policymakers

Though the depreciation of the Indian currency would have brought cheer to the exporters, outbound shipments have not increased in tandem. In fact, the country’s merchandise exports fell from US$45.2 billion in May to US$40.41 billion in June.

Imports, too, went down, touching US$70.84 billion in June, from US$73.41 billion in May.

According to an EY report, reaching the US$1 trillion export target in FY27 would require total exports to grow by about 15.3%, from a level of US$0.87 trillion in FY26.

The fall in the value of the rupee would directly impact imports.

India is import-dependent for key raw materials, including natural gas and oil. Naturally, this could shrink the size of the foreign exchange kitty while pushing up the cost of manufacturing.