Rupee and the price of dodging a century

Source: The post “Rupee and the price of dodging a century” has been created based on “Rupee and the price of dodging a century” published in “Business Line” on 21st October 2026.

UPSC Syllabus: GS 3– Indian Economy

Context: The Indian rupee has faced significant depreciation due to global uncertainty, rising crude oil prices and foreign institutional investor (FII) outflows. The rupee touched ₹96.71 per US dollar in May 2026, raising concerns about its movement towards the psychological mark of ₹100 per dollar.

Major reasons for the depreciation of the rupee

1. Global uncertainty and rising crude oil prices have increased pressure on the Indian rupee.
2. India imports around 90 per cent of its fuel requirements, creating substantial demand for US dollars.
3. Net FII outflows reached $32.8 billion during the first ten months of 2026, compared with $16 billion in 2025.
4. Foreign investors are reallocating capital towards emerging sectors such as artificial intelligence, semiconductors and data centres, while higher US interest rates are making American investments more attractive.
5. Some foreign investors are withdrawing after realising significant gains from their Indian investments.

Measures taken by the RBI to stabilise the rupee

1. The RBI has sold dollars in the foreign exchange market, with net dollar sales of $53 billion in FY26 and $35 billion in FY25.
2. The RBI introduced measures through the FCNR(B) deposit scheme to attract dollar inflows and reduce banks’ currency depreciation risks.
3. The RBI increased the repo rate by 0.25 percentage points to 5.50 per cent after nearly two years.
4. The RBI tightened controls on importers’ payments and foreign exchange derivative contracts.
5. The RBI opened a special window for oil-importing companies to manage their dollar requirements.
6. The RBI Governor indicated that the rupee was undervalued, highlighting the importance of assessing its value in the broader economic context.

Limitations of the existing measures

1. RBI interventions can temporarily reduce volatility, but they cannot permanently address the structural causes of rupee depreciation.
2. High taxation, including capital gains tax and securities transaction tax, reduces the attractiveness of Indian investments for FIIs compared with competing markets.
3. The long-term average annual depreciation of around 4 per cent in the rupee’s value adds to foreign investors’ currency-related risks.
4. Continued capital outflows and high demand for dollars can sustain pressure on the rupee despite central bank intervention.

Measures to ensure long-term stability

1. The government should review the taxation of FIIs, including the possibility of revisiting long-term capital gains tax rates, to improve India’s investment attractiveness.
2. The government should improve the ease of doing business by simplifying procedures and reducing unnecessary regulatory hurdles.
3. Faster government decision-making and a predictable policy environment can strengthen investor confidence.
4. India should focus on attracting and retaining sustainable foreign investment rather than relying excessively on RBI interventions.
5. A competitive tax regime and improved investment conditions can help the rupee find its appropriate market-determined level when investor sentiment improves.

Conclusion: The ₹100-per-dollar mark is largely a psychological threshold rather than an absolute indicator of economic weakness. India should prioritise stable currency conditions through structural reforms, investor-friendly taxation and improved ease of doing business, while allowing the rupee to reflect economic fundamentals and market conditions.

Question: The depreciation of the Indian rupee reflects both external pressures and domestic structural challenges. Discuss the measures taken by the RBI to stabilise the rupee and suggest steps to ensure its long-term stability.

Source: Business Line