The Hindu Editorial Analysis
28 January 2026
The solution to the falling rupee lies in diplomacy
(Source – The Hindu, International Edition, Page no.-8 )
Topic: GS Paper – GS 2 & GS 3 : International Relations, Indian Economy, External Sector, Exchange Rate Management
Context
The recent sharp depreciation of the Indian rupee has unsettled markets and public opinion alike, especially because it has occurred despite strong macroeconomic fundamentals. India continues to post a healthy growth rate, subdued inflation, and a manageable current account deficit. Yet, the rupee has weakened by around 6% since April 2025, prompting questions about the real drivers behind this decline.
The editorial argues that the causes are no longer purely economic but increasingly geopolitical, shifting the solution from economic management to diplomatic engagement.
The Paradox of a Falling Rupee
India’s macroeconomic indicators remain robust:
- GDP growth is estimated at 7.4%.
- CPI inflation has stayed within the RBI’s target band.
- The current account deficit has narrowed to 0.76% of GDP in the first half of 2025–26.
Under normal circumstances, these fundamentals should support currency stability. The persistence of rupee depreciation therefore signals non-economic pressures at play, undermining the assumption that exchange rates always reflect domestic economic health.
The Real Villain: Capital Outflows
Contrary to popular belief, the widening trade deficit is not the primary cause of the rupee’s fall. Instead, capital outflows have emerged as the dominant factor.
- Net capital inflows of $10.6 billion in April–December 2024 turned into net outflows of $3.9 billion in the same period of 2025.
- These outflows coincide with escalating trade tensions between India and the United States.
- The imposition of 50% tariffs on Indian exports by the U.S., along with threats of further tariffs linked to India’s crude oil imports, has unsettled investor confidence.
In this environment, investors respond not to economic fundamentals but to perceived geopolitical risk.
From Economics to Diplomacy
In 2022, when the rupee depreciated by nearly 10%, the reasons were largely economic—chiefly the U.S. Federal Reserve’s sharp interest rate hikes. In contrast, the current episode lacks a clear economic trigger.
The rupee’s decline today reflects:
- Weaponisation of tariffs for geopolitical leverage.
- Uncertainty created by adversarial trade postures.
- Fear-driven capital flight rather than market correction.
This marks a decisive shift from economic causation to diplomatic confrontation, implying that economic tools alone cannot stabilise the currency.
RBI Intervention: Limits and Role
India operates under a market-determined exchange rate regime, but this does not exclude RBI intervention.
- RBI intervention is aimed at reducing volatility, not pegging the rupee.
- Volatility management includes moderating sharp falls when shocks are sudden and externally driven.
- However, intervention has limits: it cannot counter persistent capital outflows driven by geopolitical tensions.
While the RBI can smooth the pace of depreciation, it cannot reverse a trend rooted in diplomatic uncertainty.
Why Devaluation Is Not the Answer
A weaker currency is often assumed to boost exports, but this logic does not hold in the current context.
- India’s export basket increasingly contains import-intensive goods, reducing gains from devaluation.
- High U.S. tariffs severely limit India’s export competitiveness in that market.
- On the import side, India relies heavily on essential goods, with crude oil alone accounting for nearly 25% of total merchandise imports.
Any further fall in the rupee would:
- Raise import costs,
- Fuel inflation,
- Undermine domestic price stability.
Moreover, devaluation is justified only when inflation differentials exist — a condition not currently present for India.
The Centrality of the Real Effective Exchange Rate
The editorial emphasises the importance of focusing on the Real Effective Exchange Rate (REER) rather than the nominal exchange rate.
- REER adjusts for inflation differentials and trade-weighted currency movements.
- Artificially undervaluing the currency amounts to currency manipulation, a controversial and risky strategy.
- Sustainable competitiveness cannot be built on exchange rate distortion.
Diplomacy as the Only Durable Solution
The rupee’s fall is being driven by fear-induced capital outflows, primarily linked to India–U.S. trade tensions.
- Every decline in the rupee increases the required returns for foreign investors.
- Capital flight directly impacts equity markets and financial stability.
- Continued uncertainty will accelerate outflows unless confidence is restored.
Therefore, early and effective trade diplomacy with the U.S. is essential. Without diplomatic resolution, neither monetary policy nor market intervention can deliver lasting currency stability.
Conclusion
The current depreciation of the rupee is not a verdict on India’s economic strength but a reflection of geopolitical stress. In an era where tariffs are weaponised and capital flows react instantly to diplomatic signals, currency stability has become inseparable from foreign policy.
While the RBI can cushion volatility, only diplomatic engagement and trade negotiations can arrest capital outflows and restore confidence. The solution to the falling rupee, therefore, lies not in devaluation or monetary manoeuvres, but in strategic diplomacy that reassures markets and stabilises expectations.