
The weakening Indian rupee has recently become a pressing topic of discussion among economists and policymakers. An insightful article by former Chief Economic Advisor Dr. Arvind Subramanian, along with economists Josh Felman and Abhishek Anand, sheds light on the challenges facing the rupee and its potential repercussions on the Indian economy, particularly for companies with large USD borrowings. We will try to understand the issue in a simplified way keeping this article at the background breakdown of the situation and its implications. Let’s check what goes behind the story of the falling down value of the Indian Rupee.
The Rupee’s Decline: An Unavoidable Reality
Dr. Subramanian and his colleagues argue that the Reserve Bank of India (RBI) has limited options to manage the rupee’s decline. The two potential approaches are:
- Gradual Decline: Allows for controlled adjustments in the rupee’s value. However, this invites speculative trading in the currency market, potentially exacerbating volatility.
- Rapid Decline: A sudden adjustment could stabilize the currency but risks disrupting the economy and stock markets. Both paths are fraught with challenges, leaving the RBI in a precarious position.
Why Does the Rupee Matters to Companies and Markets?
The weakening rupee has significant implications for Indian companies with substantial external commercial borrowings (ECBs) and the stock market:
- Increased Debt Burden for Companies: Companies like Reliance, Tata, Adani, Vedanta, SBI, and Bajaj Finance have raised large amounts of debt in USD. For instance, in FY2024 alone, Indian companies’ ECBs nearly doubled from $26.6 billion to $49.2 billion. A weaker rupee means higher repayment costs for this dollar-denominated debt, directly impacting their profitability and financial stability.
- Flight of Capital from Stock Markets: Foreign Institutional Investors (FIIs) hold significant stakes in Indian stocks, but they assess their investments in USD. A weaker rupee erodes the dollar value of their holdings, potentially prompting them to withdraw funds. This could lead to a major sell-off, further destabilizing the markets.
How Did We Get Here? The RBI’s 2022 Pivot?
The current currency crisis is rooted in a decision made by the RBI in 2022. The central bank moved away from a flexible exchange rate system, adopting a de facto peg against the dollar. This decision, while aimed at stabilizing the rupee, had unintended consequences:
- Loss of Export Competitiveness: By keeping the rupee artificially strong, India lost its price advantage in global markets, negatively affecting exports.
- Depletion of Forex Reserves: The RBI spent significant foreign currency reserves to maintain the rupee’s value, weakening its ability to handle future currency fluctuations.
Corporate Borrowing: A Short-Term Gain, Long-Term Pain
The RBI’s decision to keep the rupee strong was intended to make foreign debt cheaper for Indian companies, encouraging investments in manufacturing, infrastructure, and R&D. However, the anticipated private investments didn’t materialize. Instead:
Companies substituted their expensive domestic debt with cheaper foreign debt. This strategy benefited corporate balance sheets in the short term but left them vulnerable to currency fluctuations. Now, with the rupee’s decline, these “cheap” debts are becoming expensive again, completing a problematic cycle.
Economic Turbulence: The Bigger Picture
The weakening rupee is not just a corporate or market issue—it reflects broader economic challenges:
- Slowing GDP Growth: High GDP growth was expected to mitigate the rupee’s decline, but growth has slowed, reducing this buffer.
- Ballooning National Debt: The government has increasingly relied on borrowing to repay existing debts, compounding fiscal pressures.
- Speculative Risks: A gradual decline in the rupee could trigger speculative trading, leading to further instability.
Lessons from the Past and Moving Forward
Dr. Subramanian likens the situation to a “Chakravyuh” from the Mahabharata—a complex trap with no clear escape. Short-term decisions made for immediate gains have led to long-term consequences, underscoring the need for sound policy foresight. So, what lies ahead? Economists predict that the rupee’s decline is inevitable, with some speculating it could touch ₹100 to a dollar. To navigate this turbulent period, policymakers must focus on:
- Strengthening Exports: Allowing the rupee to find its natural value could improve export competitiveness.
- Prudent Debt Management: Encouraging companies to reduce reliance on foreign debt and explore domestic funding options.
- Rebuilding Forex Reserves: Prioritizing reserve accumulation to buffer against future crises.
The Last word
The weakening rupee is a symptom of deeper structural issues in the Indian economy. While the challenges are significant, they also present an opportunity for introspection and reform. Policymakers, corporates, and investors must work together to ensure stability and foster long-term growth. As the rupee’s journey unfolds, its impact on the economy and markets will be closely watched, offering valuable lessons for the future.
Mohd Ziyauallah Khan is a freelance content writer based in Nagpur. He is also an activist, social entrepreneur, and the secretary of Professional Solidarity Forum – PSF Nagpur Chapter, a networking group for professionals within the community.