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The global economy is currently navigating a period of heightened turbulence, marked by intensifying geopolitical tensions and pervasive trade uncertainty, and India is no exception. Against this challenging international backdrop, RBI Governor Sanjay Malhotra, on December 5, presented a notably optimistic assessment of domestic economic conditions, describing them as a “Goldilocks” macroeconomic environment. In his bimonthly monetary policy review, the Governor projected strong economic momentum, raising the GDP growth forecast for FY26 to an impressive 7.3%, while also presenting an unusually benign inflation outlook, with the projection revised downward to around 2%. The coexistence of robust growth and subdued inflation not only created ample policy space for a 25 basis point monetary easing but also reinforced the Governor’s confidence in the Indian economy’s capacity to withstand external shocks.

Governor Malhotra reiterated the Reserve Bank of India’s long-standing exchange rate policy, emphasising that the central bank neither targets nor defends any specific level of the rupee. Instead, it allows market forces of supply and demand to determine the currency’s value, intervening only to curb excessive or disorderly volatility. Many analysts view this statement as an indirect response to the IMF’s recent classification of India’s de facto exchange rate regime as a “crawl-like arrangement”—a system characterised by gradual, managed adjustments in the currency’s value alongside frequent intervention, akin to a crawling peg.

However, this official stance appears at odds with the significant pressures and external challenges currently confronting the foreign exchange market. Throughout 2025, the Indian rupee has depreciated sharply against the US dollar, falling by roughly 5–6% since the start of the year and breaching the psychologically important ₹91 mark in December. This performance has made the rupee the worst-performing currency in Asia during the year. The depreciation has been driven by several factors, including sustained foreign portfolio investment outflows—exceeding $18 billion from equities—heightened dollar demand from importers, and uncertainty surrounding trade negotiations between the US and India. Although the RBI’s interventions have been relatively restrained compared to last year, when net dollar sales were estimated at over $60 billion, sales of around $21–22 billion are estimated to have occurred during the first nine months of 2025, taking cumulative sales to about $25 billion by December. This indicates that the central bank has remained actively engaged in smoothing excessive exchange rate volatility. While the rupee’s depreciation has raised concerns about currency stability, the RBI views it as a necessary adjustment that unlocks certain structural advantages for the broader economy.

Specifically, the Governor highlighted the benefits of rupee depreciation, characterising the exchange rate as an important “shock absorber” that enhances export competitiveness and facilitates adjustment in the external sector, thereby strengthening the economy’s resilience to global shocks. The key benefits articulated include the following.

A depreciation of around 5% is expected to boost export competitiveness by improving the price attractiveness of Indian goods and services in global markets, particularly for sectors reliant on external demand. Price-sensitive merchandise exports benefit from lower dollar-denominated prices, while dollar-earning services such as IT and BPO gain from higher rupee realisations on existing contracts. These improved earnings can support higher capacity utilisation and incentivise incremental capacity expansion in export-oriented sectors.

From a growth perspective, a 5% depreciation is estimated to add roughly 25 basis points to GDP growth through an improvement in net exports. While not a substitute for structural reforms or fiscal support, this channel provides a counter-cyclical buffer during periods of global uncertainty. RBI model-based assessments consistently suggest that exchange rate flexibility delivers small but reliable short-term gains to economic growth.

On inflation, the Governor acknowledged that currency depreciation could add around 35 basis points, but argued that this impact remains manageable in a low-inflation environment such as that prevailing in 2025. The limited pass-through reflects favourable global commodity prices and supportive domestic supply conditions, allowing depreciation effects to be absorbed without destabilising inflation expectations or undermining price stability.

Depreciation also strengthens external sector buffers by raising the rupee value of foreign inflows, particularly remittances and services exports, thereby helping to moderate the current account deficit. Strong services surpluses and remittance flows act as natural stabilisers when merchandise exports face global headwinds, enhancing external resilience without necessitating aggressive drawdowns of foreign exchange reserves.

Finally, by refraining from targeting specific exchange rate levels and intervening only to curb excessive volatility, the RBI allows the rupee to adjust in line with market fundamentals. This approach preserves foreign exchange reserves, reduces moral hazard associated with persistent currency defence, and creates space for growth-supportive domestic policies. A flexible exchange rate regime also signals confidence in economic fundamentals, potentially encouraging stable long-term capital inflows rather than short-term speculative movements.

While the RBI Governor’s arguments are theoretically sound and well grounded, historical experience offers limited evidence that currency depreciation alone has consistently delivered the range of growth, export, and external sector benefits outlined above, particularly in economies characterised by structural import dependence and deeply globalised supply chains. In many cases, gains from depreciation have been offset by higher import costs, weaker investment sentiment, and balance-sheet stress among firms with foreign currency exposure. Moreover, export responsiveness to exchange rate movements has often been muted due to supply-side constraints, low value addition, and the growing share of imported inputs in production. These limitations in translating depreciation into sustained macroeconomic gains have been highlighted by several global investment banks in their recent assessments of the rupee’s performance.

Investment Banks’ Assessment: A Retrospective Reading of Rupee Depreciation

Analysts from Bank of America, Merrill Lynch (Global Research note dated December 8, 2025), and Goldman Sachs (research commentary dated December 11, 2025) have offered more cautious assess-ments of the rupee’s depre-ciation in 2025. Their analyses highlight potential downsides, risks of overshooting, and structural vulnerabilities that could dilute—or even outweigh—the macroeconomic benefits often associated with currency weakness.

First, despite the theoretical expectation that depreciation enhances export competitiveness, India’s export performance in recent years has remained subdued. Structural factors such as rising import intensity in manufacturing, capacity constraints, and low domestic value addition have weakened export price responsiveness. Goldman Sachs warns that any gains from depreciation are slow to materialise and are often offset by weak global demand and trade uncertainty. Bank of America,

meanwhile, characterises the recent rupee weakness as being driven more by capital outflows than by trade fundamentals, casting doubt on the sustainability of depreciation-led export gains.

Second, from a growth perspective, Bank of America does not view rupee depreciation as a benign support to economic activity. Instead, it argues that a weaker currency can slow growth by raising import costs, weakening corporate balance sheets, and undermining business confidence.

Merrill Lynch similarly points out that import-dependent sectors face pressure on profit margins, while Goldman Sachs cautions that currency weakness may discourage investment and hiring. Overall, these assessments suggest that export gains from a weaker rupee are likely to be limited and slow to materialise, and may not fully offset the adverse effects, particularly when depreciation is driven by financial stress rather than normal cyclical adjustment.

Third, inflation risks may be more asymmetric than assumed. Despite the current moderation in headline inflation, Bank of America notes that exchange rate depreciation can still exert meaningful upward pressure on prices through imported intermediate inputs, precious metals, and capital goods, even if the impact is partly contained by subdued crude oil prices. Goldman Sachs highlights the risk that geopolitical and commodity-related shocks could intensify imported inflation pressures, potentially necessitating a tighter monetary policy response. Merrill Lynch also cautions that a prolonged phase of currency weakness could unsettle inflation expectations over time, especially if depreciation persists beyond the current low-inflation environment.

Fourth, external buffers remain under pressure despite strong services exports. Bank of America and Goldman Sachs note that rupee weakness has coincided with sustained capital outflow pressures, including equity outflows exceeding $18 billion in 2025, pointing to external vulnerability rather than underlying strength. While services exports and remittances provide an important cushion, Bank of America argues that these inflows may not be sufficient to fully offset risks arising from volatile portfolio flows and heightened trade uncertainty. Merrill Lynch adds

that some firms carry unhedged foreign currency loans, increasing repayment costs when the rupee weakens and potentially eroding the economy’s external position while adding pressure on foreign exchange reserves if intervention continues.

Finally, while investment banks agree that some degree of exchange rate flexibility is desirable, they warn that it can also lead to sharp short-term movements during periods of global stress. Bank of America attributes part of the recent rupee decline to capital outflows and notes that such moves can reverse quickly or expose underlying weaknesses. Goldman Sachs cautions that even limited central bank intervention may become difficult to sustain if outflows persist. Merrill Lynch adds that frequent intervention can blur signals about India’s commitment to exchange rate flexibility, as reflected in the IMF’s “crawl-like arrangement” classification.

In conclusion, while the RBI Governor’s assessment underscores the theoretical benefits of rupee depreciation—ranging from export competitiveness and GDP support to external resilience and policy flexibility—historical experience and recent market assessments suggest that these benefits are neither automatic nor assured. Structural constraints, import dependence, capital flow volatility, and balance-sheet vulnerabilities limit the effectiveness of currency movements as a tool for growth or external stability.

Investment banks’ analyses highlight that depreciation can introduce near-term risks to inflation, investment sentiment, and financial stability, particularly when driven by external pressures rather than cyclical adjustment. For the public, this underscores the importance of avoiding both excessive optimism and undue alarm over currency movements, and of making financial and investment decisions based on a careful assessment of fundamentals and risks.