Full Text | ‘Ironical that the Worst Performing Years For the Rupee are the Best For RBI in Terms of Trading Profit’

In a conversation with The Wire’s founding editor M.K. Venu, eminent economist and former vice chancellor of Gokhale Institute of Politics and Economics Ajit Ranade says the RBI is creating a kind of a perverse incentive by selling dollars from the stock of foreign exchange, even as the rupee continues to fall. 

Ranade says that around 40 billion dollar of FII money has left India in the last two years, while for the first time last year our BoP turned negative after a long time. Some estimates for this year 26-27 say it could go down to -75 billion dollars.

Below is the full text of their conversation, transcribed by Ipil Baski, an editorial intern at The Wire.

M.K. Venu: Hello and welcome to this special conversation on The Wire. And today we will talk about something which has caused a lot of anxiety to a lot of people, the government, business people, to generally all those who are involved in any economic activity, and it is the volatility that we have been seeing in the rupee exchange rate, especially post the US-Iran war. Not just volatility, the rupee that has been in a sort of freefall and it has caused a lot of anxiety to the RBI to the government, to business agents, to economic agents and people are still speculating as to where the rupee is going to end. It has been weakening pretty rapidly and not just post the US-Iran war, the Indian Rupee has been the worst performing currency even in 2025, it has been the worst performing probably among the worst performing currencies in 2026 so far and one may recall that the Economic Survey, a few months ago had explicitly mentioned that the Indian rupee was punching way below its weight. It spoke about a twin set of problems. One is the rupee was punching way below its weight and the flip side of it, chief economic adviser actually also said that that a special study needs to be done to understand why is foreign investment not coming into India or running away from India and of course, these trends have got exacerbated after the US-Iran war. So, to discuss this we have with us a very eminent economist who’s written a lot in recent weeks on the subject. Ajit Ranade, who is the former vice chancellor of Gokhale Institute of Politics and Economics and Ajit is the right person to talk to because besides his academic credentials, he also worked with the private sector, he was chief economist with the Birla Group for a long time. So, he understands how the other side also works, how businesses perceive the currency dynamics. So, welcome to our show Ajit, thanks for coming on a short notice.

Ajit Ranade:  Thank you Venu for inviting me and your kind words of introduction.

MKV: Ajit, just to open the conversation, can you tell us, you wrote two recent columns, one in The Tribune and another one in another newspaper, where you particularly expressed some worry, anxiety over the way number one, the rupee was going and how you also spoke about RBI’s management of the currency and in particular you pointed out the fact that the weakening of the rupee since last year has caused RBI to make lot of profits because RBI has been selling dollars to defend the rupee. So, when the RBI’s reserves are about 70% in dollars and other hard currencies like Euro, etc. and in gold also. So, when all these assets were appreciating against the rupee, in the meanwhile when the RBI was selling dollars it was actually making profits, it was making essentially making profits out of a weakening rupee and RBI recently transferred a lot of those profits, in fact a huge  number unprecedented, 2.8 lakh crore to the centre as dividend to actually plug its fiscal deficit. Now, you have commented on this on how a weakening rupee is making RBI earn profits and which is in turn being used to cover the fiscal gap and you have said that this is not a healthy practice. Can you explain this?

AR: Yeah. Venu, the thing is like this that the Reserve Bank of India is the monetary authority and is primarily responsible for conducting monetary policy and the fiscal policy is the responsibility of the government of India. So, typically fiscal policy is about budgets and taxation and revenues for the government, and monetary policy is about interest rates, exchange rate management, credit flows and stability of the financial sector. So, one thing that I was observing is that not just this year, but for the last few years, the surplus that is transferred from the RBI annually from the RBI, the monetary authority, to the Union government and remember that this money is not sharable, it’s not part of the divisible pool of taxes which are shared with the states, this goes to the Union government that has become a very significant part of the Union revenues. It’s close to 8% now and in fact it’s also reflected in the budget. So, in the beginning of the year when the finance minister presents the budget you find that item there. So, it’s almost become a standard practice. Now, by the way even if the rupee was, just for the sake of discussion we can say even if the rupee was depreciating, it does not automatically mean that the RBI has to make profits. It happens only when the RBI tries to defend a falling rupee. So, let’s say it keeps on defending. So, first of all, it accumulates dollars because it’s like I guess, like an insurance you need to have, dollars in case of certain flights. So, it buys dollars let’s say at 84 and it then sells hundred billion dollars out of its precious stock of foreign exchange at 94. So, the 10 rupee drop from 84 to 94 multiplied by 100 billion dollars is a, 1,000 billion rupees which is one lakh crore straight away. And since the rupee has been falling rapidly, plus the fact that the RBI has been selling these two together is generating profits and those profits are getting transferred to the Union government. So, it’s creating a kind of a perverse incentive as if that you keep selling dollars from the stock of foreign exchange, which by the way we have to have, it’s like a the dollar is an external currency for us we need to have a stock of foreign exchange to defend against certain stops and other liabilities but you’re selling 100 billion of that which is straight away becoming a fiscal resource, so that was a starting point. So, I was concerned that this number is actually in just last 3-4 years it’s just been going up and every year is a record high. This year is almost 2.9 trillion rupees. Now, just to just to finish that point they say that this is not illegal because there is an economic capital framework risk which was sort of decided by the Bimal Jalan committee in 2019. That was a contentious issue in itself, but anyway, and they said that the RBI should only keep something like 6 and a half or 7% of its balance sheet and whatever surplus is there above that, it should compulsorily transfer to the government. Now, I don’t know whether one should examine that you know even at a deeper level, but I’m just saying, the RBI would happily defend and saying no we are not doing anything illegal but I think it is creating a powers incentive for becoming a fiscal stabiliser.

MKV: Yeah. So, you just said Ajit that this year has been the highest ever, answer from RBI, its profits that they’ve made by selling dollars in the open market. The rupee profits that they’ve accumulated, it’s a record transfer this year. As you said it’s 8% of the total revenue and it’s probably about 17-18% of the fiscal deficit itself, the total. Do you recall what was this say 5-7-8 years ago before Jalan committee came up with this framework? Would it have been less than say 2-3% of the revenues?

AR: Yeah, it used to be, I remember it was about 50,000 crores. So, let’s say almost 3 trillion dollars. So, it’s gone up six fold. Six times in about seven, eight years. So, normally that balance sheet of the RBI should grow at a commensurate rate roughly equal to nominal GDP of the country, so you don’t have monetary extraordinary expansion. I don’t think we were not like as bloated as some other central banks did after the 2008 crisis. Therefore, this dividend transfer is even more remarkable.

MKV: Also Ajit, you know I read an article that Dr Y. Venugopal Reddy, one of the best central bank governors that we’ve had, he wrote in the EPW in 2024, where he explicitly says that profits made out of such volatility in the currency and such weakness in the currency should be that the RBI should be very very cautious in transferring it to the centre. And he argued that by doing this, the RBI is effectively converting a hard budget constraint into a a soft one, isn’t it?

AR: So, yeah, I mean Dr Reddy, of course, was absolutely right that the dollars that come into India are not an export surplus like all other East Asian neighbours. Large countries South Korea, Taiwan, China, Japan all their dollar accumulation, they also hold large stocks of foreign exchange, namely dollars but therefore their earnings, if they’re actually, but it is actually export surpluses. We have perennially been a deficit country on the trade account and the current account. So, if we have surplus dollars coming in it’s because of balance of payments and they come in because of external commercial borrowings, foreign direct investment, private equity and so on and so forth. So, actually, that has to be treated very carefully. You know the irony Venu, as you said this year or last year was the one of the worst performing years for the Indian currency rupee and it became one of the best years for the RBI in terms of their trading profits.

MKV: Yeah. So, are you suggesting Ajit, I mean it follows from this logic that you just talked about and what Dr Venugopal Reddy also argued in his article that there could be a need to review this Jalan committee recommendation itself because probably the Jalan committee recommendation did not foresee this possibility that RBI which has accumulated huge amount of dollars, it was 700 billion dollars at the beginning of this year, and most of it in the nature of liabilities as you said, these are all external commercial borrowings, foreign borrowings and FDI which are also in the nature of liability because equity eventually also comes on the liability side of the balance sheet right? So, do you think that Jalan probably did not foresee such a situation where the rupee would keep getting buffeted, and paradoxically the RBI would make a lot of money selling dollars and then transfer all that to the centre making them fiscally complacent at one level, right?

AR: Yeah. I mean, it’s becoming like a treasurer to the Union government. Absolutely, first of all, one point is that the Jalan committee recommendations were x% of RBI’s balance sheet, now, this year, the balance sheet has ballooned also partly because the gold has been revalued. Gold prices have gone up by 50 or 100%, and that reflects in a bigger balance sheet for the RBI. Now, if you take 6% of that bigger balance sheet, much of it has happened because of gold and yet you are able to take away the surplus. That’s one point. Secondly, right after 2019 or a couple of years later, we have seen this very fast growth of outbound FDI. So, while inbound FDI was 80 billion dollars even last year and so on but net FDI has fallen drastically down to nearly zero and there was a danger that it may go into negative territory. This is not something I don’t think the RBI and Jalan committee contemplated. We always thought that we’ll get 1 or 2% of GDP as net FDI.

MKV: This could never have been anticipated by them.

AR: Yeah. And then on top of it, we should look at the granular picture. What are the components of this outbound FDI? There are of course Indian companies buying abroad, so if they are owning assets abroad, that’s not a bad thing. Then there are Indians sending money on LRS but increasingly there are exits of major marquee names out of India, starting with Holcim or Citibank which had a retail banking network almost 100 years. So, I’ve listed some of those company names as you know in my article. So, we have to examine why Whirlpool, then of course the IPO listing of Hyundai I think, some of the big names why do they want to cash out and leave?

MKV: Here I want to come in here. You mentioned this and you also argue in your article that there is something wrong in the way the Indian system operates as a whole. The policy system, the regulatory system, tax system all put together that it does not create enough of an incentive for foreign capital to come and stay in India for a long time. As you said, you named all the marquee companies, they’ve all come and left India. You know, General Motors left India, Ford Motors left India, Harley-Davidson left India and auto companies typically they go to various big markets and they go there almost like to work permanently, stay there and expand the markets permanently. But in India, we’ve seen a lot of exits not just as you said cement companies, we have seen rate wholesale you know metro cash and carry etc. What could be the reason, why are big companies except in the area of let’s say you know tech, Facebook and Microsoft and these other companies, Amazon all are here but in manufacturing, people are just leaving India, what could be the reason?

AR: Of course, there are a couple of things by the way, not to forget that Tesla, which had such a big announcement now, they recently have announced that they’re not going to build a factory here. So, not to forget that Google, Meta and all have put in money. Google has announced his 15 billion dollars in Andhra Pradesh and so on. But it’s true that I mean one charitable explanation could be that these foreign companies are getting out competed by the Indian counterparts and therefore they are just you know closing shop. But I think you know probably the reality is something different. We have to find out why is this long-term green field sticky patient FDI. We need long-term and sticky and patient FDA to stay here. Not private as you said they’re the increasing flow of private equity. Now private equity is counted as FDI but remember, they have a 10-year clause that, it’s basically long-term debt disguised as equity investment. So, it is not as firm and as firmly rooted in India as the regular green field FDI. Why is more of that not coming in? I mean this trend you know they say that perhaps the productivity of capital is higher. I don’t know maybe the nature of the economy, but I think it’s a serious matter which requires and this is not just me. I mean many people have commented that the big challenge right now is private sector investment as a proportion of GDP, whether private sector whether domestic or foreign. We need to substantially increase it and we need to increase it in areas and in a manner where it is sticky not just flight. By the way the other things that have happened is the IPOs, last three four years we have seen and SEBI has commented on this that 60 to 70% of the IPO proceeds are simply going to cash out the early investors. That money is not going as fresh investment into the company, it’s early guys who are cashing out so the retail guys who come in they’re actually you know kind of subsidising the profits of the editors. Same thing I suspect is happening with the retail SIP kind of investment. The AMFI, Association of Mutual Funds of India, they had run a very successful campaign for many years of SIP mutual funds, SIP hai toh sahi hai, which is a good thing and it is deepening the financialisation of savings and so on and so forth but at a rate of 20 to 30,000 crores of SIP money coming into the stock market but at the same time I think something like 40 billion dollar of FII money has left India in the last two years. Because of the SIP money Indian stock market continues to remain expensive, and it’s now this year, according to the emerging markets MSCI index, Morgan Stanley Capital Index, for last 24 months India is down minus 10% and MSCI is plus 57%. So, you know, it is the MSCI investors are finding India expensive because the domestic investors are propping up…So I’m just thinking whether this is a way of the retail investors at large in a diffused way, actually generating profits for the exiters I mean these are just questions you see.

MKV: No you know, you’re so right Ajit. In fact, a very senior fund manager Shankar Sharma, has in a kind of rhetorical sort of way he has said that the Indian investor is just preparing ground for foreign FIIs to exit. He says the Dharavi investors are enriching the Manhattan people who had invested in India, are moving out and the domestic SIP investors are actually facilitating their exits.

AR: Profits of Jane Street are so big that they triggered a scrutiny by SEBI. But these are questions you know, I mean I’m not saying that Indian savings should not deepen the financialisation of financial sector you know, we need to have financial component of savings to increase as aggregate savings of the economy. Macro savings are about 25-30% and we need to have an increasing prop, but we need to find out a way that it doesn’t end up just you know like a reward for foreigners to exit and not come back

MKV: But coming to the larger question that you raised about private investment, you know India’s private investment to GDP ratio used to be at the peak you know 2007-8, it used to be around 17-18% of GDP. Now it’s come down to by some measure about 11%. Two things, huge private investment stagnation, also there is a competitiveness issue. You know economists like Shankar Acharya have been writing that India’s merchandise exports have hardly grown in the last say 10-12 years. They’ve been growing at maybe one and a half percent. Of course, if government tries to you know present a combined picture of services and merchandise but if you look at merchandise separately which is linked to manufacturing, there is a competitiveness issue and all the stock markets that are going up today as you just said, they’ve all been achieving manufacturing excellence in some field or the other, some new field maybe semiconductor chips in Taiwan, Korea or maybe places like Brazil and all, because of commodities. But where does India stand? There is lack of private investment, there’s lack of manufacturing, competitiveness and stagnation in exports. So, with FDI also not slowing down where do you think our external sector is headed? I wanted to just give us a comprehensive view of this.

AR: Yeah, I mean it’s definitely a very serious concern as I said for three four years in a row, the balance of payment situation, for the first time last year that is 25-26 fiscal year, our BOP turned negative after a long time and its 30 billion. Some estimates for this year 26-27 say it could go down to -75 billion dollars. Now this is unprecedented, BOP, that’s because the capital account is also negative, current account. Secondly, remember that the two most important earnings on dollar front, external front, number one is software services, I’m just giving a general software including everything GCC is included something like 220 billion dollars and remittances are growing so far quite robustly about 135 billion dollars. So, they are in the range of half a trillion you know 220 plus 130, 400 fund it’s conceivable if this strength continues to be there, we could reach half a trillion just on these two. But on the rest of it, then we have of course petroleum refining petrol products but otherwise we have still not been able to sort of take leverage on the labour intensive exports. What I mean by that is the going back to the dollar and capital account, actually large companies, when they take import finance or they take external commercial borrowing they have an interest in having a rupee defended, because they have obligations. India has sovereign 700 billion dollars of foreign exchange reserves but almost 700 billion dollars of foreign loans. But none of it is sovereign, meaning government of India’s foreign indebtedness and its foreign obligations are negligible, most of it is private sector. So, there are large, it’s not small MSMEs who have foreign loans. We need to examine, as I said to you when we were discussing, there’s a deeper issue here that when we try to defend the rupee or sell dollars or make profits in RBI, what is happening to the whole labour-intensive export opportunity? I mean all these late comers like Vietnam and Bangladesh and even Sri Lanka, they say that the textile story is over, the automation, but now even they have 40-50 billion dollars of exports, I mean Sri Lanka and Bangladesh. Why is that we are still struggling with energising our labour-intensive exports? Our biggest export is remittances which is kind of an indirect labour export, another big export is software services which is also kind of labour, but we need to do much more on that front. So, I think the answer to your question is it’s a worrying situation how to build external strength.  I mean globalisation might be slightly at a slower pace now, but it’s certain we’re not in a complete deglobalisation. There are blocks and so on. My favourite example is that China is a 6 trillion dollar consumer economy growing at 3-4%, India doesn’t even have that. 140 countries export to China. See China is not only the biggest exporter in the world. They’re also biggest importers. So, why can’t we have even a 1% share of that is 60 billion dollar of exports to China? What does it take to export to China?

MKV:  So, Ajit finally would you would you characterise India’s external sector today as very vulnerable? Also in the context of the no resolution of US-Iran war and even if there is resolution many experts saying that it’ll take 7-8 months for things to normalise in terms of regular flow of oil, gas, LPG fertiliser traffic.

AR: Yeah, as I said the warning situation is not only on the FDI and the balance of payments but the inflation impact due to prices and shortages. We are hearing stories about how there are actually in parts of the country there are shortages of petrol, diesel or LPG, perhaps they are not there in big bigger cities so the pinch is not being felt but that’s something worrisome. But now we have the fertiliser season coming. Despite whatever 70 years, so many decades we still are dependent for almost one-third or more than one-third of our fertiliser usage is imports. We had this one very successful experiment in Oman, don’t bring in the gas but just produce the fertiliser and bring it in a joint venture, but that was only a solitary success, we should have had many more such things and fertiliser is key to India’s agriculture production and this extended impact of the Iran war is that there may be that fertiliser price spikes, as well as shortages because unless we manage to source it from some other, plus it will have a fiscal impact because we still subsidise fertiliser in a big way. Actually, that reform also has been pending for a long time that how to rather than subsidising the product subsidise the small farmer. How to target this challenge is that they say 40% of India’s farming is done by labour, I mean the landless labour. So, how do you subsidise the farmer, when there is more sandy land. So, it’s not an easy challenge to crack but I think we need to substantially address this fertiliser subsidies, about 2-3 lakh crores now and this year it’s going to be a tough situation. There have been instances where fertiliser had to be distributed through police stations now under police protection.

MKV: So, would you characterise this as a perfect storm around the external sector and where do you see the rupee headed? Can you give your estimate for say the year end or something?

AR: So, lot of people have been saying that hey this is not 1991 that our reserves were down to zero. This is not 2013 the taper tantrum in the fragile five, but I think you know even though our GDP outlook, even the IMF is saying and others are saying we may still be above 6 or 6 and a half per cent, inflation is still nowhere near the highs of 2013. Foreign exchange reserves despite all this sale of dollars are still at around 650- 625. But I feel that the situation can turn worse very rapidly.

MKV: I think it is not that this has not happened because the oil reserves are being drawn down. Most economists around the world say the real inflation and other statolatry kind of tendency is not kicked in as yet.

AR: Yes. So, there is the equivalent of this. There’s this concept called sudden stops. So, foreign exchange, I think something equivalent in the physical world in terms of the the oil shortages and the fertiliser shortages, we might just suddenly run into a drastic situation and then we’ll have to do rationing, so that is something we need to look out for and that’s why I feel it’s better to worry now and start building in, rather than just having draconian measures like sell only under police protection or do intensive rationing and god forbid we have to do something like Sri Lanka. Sri Lanka went into a crisis because of their foreign exchange situation. They had to cut down fertiliser imports drastically. There was a change of government because of that, there were riots because they tried to induce farmers to switch to natural farming or organic farming but that didn’t work. So, I don’t think it will work in much larger country like India.

MKV: Okay. Thank you very much Ajit Ranade for uh for talking to us and giving us time for this conversation. Thank you.

AR: Thank you very much. Thank you.

MKV: Thank you.

This article went live on June first, two thousand twenty six, at twenty-six minutes past seven in the evening.

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