In this episode, journalist and author Puja Mehra speaks with Rajeswari Sengupta, Economist and Associate Professor at Indira Gandhi Institute of Development Research (IGIDR), about the recent volatility in the rupee and the Reserve Bank of India’s response to it. They discuss how global shocks—from the West Asia conflict to sustained capital outflows—have exposed deeper structural vulnerabilities in India’s external sector.
Sengupta explains how the rupee’s weakness is not just cyclical but rooted in fundamentals, including rising import dependence, especially on energy, and weakening foreign capital inflows. Against this backdrop, they examine the RBI’s increasingly aggressive intervention to stabilise the currency.
But are these measures addressing volatility, or attempting to influence the level of the exchange rate itself? What does this mean for the rupee’s role as a market-driven price, and for India’s ambitions of greater financial openness?
Tune in for insights into the tensions between currency management and market forces, and what it means for the future of India’s exchange rate framework.
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TRANSCRIPT
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Puja Mehra: Hi Rajeswari, thank you so much for coming to the show. Thank you so much for having me. Rajeswari, the rupee is clearly under stress.
The fall we are seeing though isn’t a recent phenomenon. Since the present RBI governor stepped into office, the rupee has been on a downward spiral intermittently. But what is new is that we can detect a certain desperation in the RBI’s defence of it.
They spent nearly $40 billion in the forward and spot markets since Feb, and now they’ve shifted to off-market measures that different commentators are saying different things about. And I would also ask you to tell us how we should look at these things. But before we get to that, I would like you to start by helping us understand what are the pressures and what are the reasons for the rupee’s weakness?
And then probably we could go on to discussing the RBI’s approach and what you think of it.
Rajeswari Sengupta: Sure. So as you correctly mentioned that even before the current bout of volatility and sharp depreciation, the rupee has been weakening for a while now. In fact, overall in fiscal year 2025-2026, including the current West Asia war effect, the rupee has depreciated close to around 10%, which has been the sharpest depreciation of the rupee since 2011-12, which is when the global financial crisis effect was unfolding.
So there has been a lot of depreciation pressure on the rupee in general. And I’ll talk about that a little bit later. But more importantly, what has been happening over the last six weeks, of course, is the repercussion of the West Asia war.
And why is the rupee depreciating? Or why is the currency getting so volatile as a result of the war? The primary reason is because of India’s excessive dependence on imported energy.
We are dependent on 90% or 80% of our oil requirements are coming from imports. About 40% or 50% of that is passing through the Strait of Hormuz, which is currently effectively closed. Then we also import substantial amounts of LPG as well as LNG.
With LPG, particularly 90% of the imported LPG passes through the Strait of Hormuz, which again is effectively shut. And about 40% or 50% of LNG passes through that same shipping route. So because of this singular factor, one, because of India’s excessive dependence on imported energy, both crude oil and gas, and because of the fact that the Strait of Hormuz has been effectively closed ever since the war began, and also because a lot of energy and a lot of oil and gas infrastructure facilities have been hit, that means that there is a very sharp increase in the price of oil and gas in the global markets. And India, being a very significant importer, is facing a ballooning of energy import bill.
Now, most of the emphasis has gone on oil and gas, but it’s also true that the other commodities, for example, fertiliser, again, something that we import very heavily, and quite a bit of it from the Middle East, which passes through the Strait of Hormuz, that is also getting stuck. And that means we are going to face a higher price when we import fertilisers as well. Now, when the import bill goes up, what happens is that the importers in India are demanding a lot of dollars to pay for this high import bill.
And when they demand such high dollars, essentially, the demand for the rupee is falling. So that is a very big reason why the rupee is depreciating. Secondly, this is on the trade channel.
Secondly, what happens when there is so much of geopolitical uncertainty, and there is no guarantee as to when this conflict is going to end, foreign investors who invest in Indian capital markets turn highly risk-averse. And they start pulling out of what is called high-risk emerging markets like India. And they start pulling out of the equity market.
They start pulling out of the debt market. And when they take their money out, essentially what they are doing is they’re converting the rupees into dollar and taking the dollar out. And as they start dumping rupees, that means there is excess supply of rupees again in the market.
And that also pushes a downward pressure on the value of the rupee. So two very big factors because of which the West Asia War has exacerbated the depreciation pressure on the rupee. Now, it’s important to keep in mind that even going into the war, the rupee was a very weak currency.
In fact, it was one of the weakest currencies amongst the Asian peers. And that’s because even before the war, because of trade-related uncertainties, because of tariff-related uncertainties coming from the US, general global trade landscape uncertainty, and also because India has sort of not been able to catch up to the artificial intelligence bandwagon, there was a massive outflow of foreign capital from the Indian equity market. I think the rough estimates are about anything close to $20 billion of money being taken out of the equity market alone in the April to December period of 2025.
And that could have gone up over the last few weeks. And when foreign portfolio investors are pulling money out, once again, that puts a lot of pressure on the rupee to depreciate. It’s interesting to note that before the war in West Asia, the current account deficit, which is the trade deficit essentially, in India was not really very high.
It was about 1% of GDP or even slightly lower. But the rupee depreciation before the war was very steep, implying that India was struggling to finance even a low current account deficit, which is about less than 1%. And the reason this is important to understand is because there was a point of time when India could very easily finance 2% of GDP, when the current account deficit was around 2% of GDP.
In fact, during the boom years of 2004 to 2009, India could finance close to 9% to 10% of GDP, right? That’s how big the capital inflows were. So there is a very deep fundamental problem that has been playing out even before the war started, that India is not being able to finance even a 1% of current account deficit because of sustained capital outflows, both foreign portfolio investment, net FDI has practically been zero.
So we are not able to attract enough foreign capital. Indian assets are not considered to be valuable or rather good enough to invest in. As a result of which we have been struggling to finance current account deficit.
Now, when you add the war-related pressure on the current account, the situation gets significantly worse because as I was just saying, because of the war and the rising import bill, the current account deficit is now going to become much higher. Also because remittances, which is a big part of our current account, a lot of the remittances come from the Middle East. Presumably that’s going to take a hit.
Also about 15% of our exports go to Middle East. All of that is stuck because ships are not able to cross the Strait of Hormuz. So all of that pressure the current account deficit to go up.
Now, if let’s say the current account deficit in the fiscal year of 2596 or the next fiscal even goes up to close to 2% of GDP, then we are in serious trouble because as I was just describing, we are even struggling to finance 1% of that. So anything above 1% is going to become even more of a problem to finance with the sustained capital outflows, which means the pressure on the rupee to depreciate is going to continue to be very strong. So that’s basically a fundamental structural reason why the rupee has been depreciated.
Puja Mehra: I think that’s a good way to understand why the RBI is seeming almost desperate in its defence of the rupee. So do you want to say now something about what their approach has been and if that is the way to go about addressing this problem of inability to finance the current account deficit?
Rajeswari Sengupta: So the RBI has been trying very actively to stem the rupee depreciation even before the war began by selling dollars and buying rupees in the spot market. And because the spot market intervention shows up directly in the foreign exchange reserves and when the foreign exchange reserves start depleting, then there is a bit of a panic in the market because reserves ironically have become a barometer of macroeconomic health. And the more you lose reserves, the more the foreign investors or other traders, everybody thinks something is going wrong.
So then the RBI has shifted a lot to the forward market because the forward market intervention doesn’t immediately show up in reserves. So the RBI has run up a very big outstanding position on its net forward book. So both through spot and forward markets, the RBI was aggressively trying to stem the depreciation in the run-up to the war, right?
And of course, that doesn’t always help because as I was just describing, the pressure on the rupee to depreciate is structural. And what the RBI was doing was more like putting a band-aid on a very large wound and the blood is going to keep spilling over from all possible sides, which is exactly what was happening. The rupee was depreciating steadily despite RBI’s efforts.
When the war started and the pressure on the rupee to depreciate became even stronger, the RBI continued to do spot market intervention. I think since the start of the war itself, the RBI lost around $30 billion of reserves, which is a pretty big amount to lose in six weeks. And estimates suggest that currently its net outstanding forward position is around $100 billion.
So FX reserves are around $688 billion. If you add the forward position, which need to be settled at some point of time, the reserves will fall to $588 billion, which is less than 10 months of import cover. And if the RBI continues to intervene in the forward and the spot market, the reserves will fall even more.
Now, when the RBI started bleeding reserves, and of course, that’s a bit of a worrisome situation, then it started taking other unconventional and sort of unprecedented measures to stem the depreciation. While the RBI’s official position has always been managing currency volatility, given the extent of intervention and measures taken by the RBI, it doesn’t seem that the RBI is only concerned about volatility. It seems that from time to time, the RBI is potentially trying to manage the level of the exchange rate as well.
What the RBI did was, on 27th March, RBI announced that all commercial banks in India will have to limit their net open position in the foreign exchange market onshore to $100 million on a daily basis. Now, why is this important? And why did the RBI do this?
One, of course, because it was losing reserves and that was no longer a sustainable option. Secondly, and this needs us to go back a little bit in time, sometime around COVID, the RBI allowed Indian banks to take positions in the offshore non-deliverable forward market. Indian rupee has a very big offshore non-deliverable forward market, primarily because there are capital controls that exist in the onshore market, because of which FX market participants cannot take a lot of positions to hedge or speculate against the rupee.
So therefore, the offshore market over the years has become very big. The RBI allowed Indian banks to take positions in the offshore market around 2020. Then there were a lot of policy flip-flops.
It kept going back and forth and kept putting restrictions on the banks when the Russia-Ukraine invasion happened, because that’s also when the rupee was becoming volatile and it was depreciating. Finally, sometime around 2023, the RBI gave permission to Indian banks to trade in the offshore NDF market and to offer NDF contracts in rupee to whoever was interested, resident, non-resident, et cetera. So what the banks were doing, and that’s a perfectly legitimate normal trade to happen, when the current crisis started unfolding in West Asia, the spread on the dollar rupee contract between the onshore market and the offshore market started widening, because rupee was much more depreciated in the offshore market, because there is no RBI trying to prevent the depreciation, sort of the true value of the rupee was unfolding in the offshore market, but in the onshore market, the rupee was overvalued.
And that creates a perfect arbitrage condition, which the banks were legitimately exploiting because they had been given permission by the RBI to participate in the NDF market. They did not do anything that they were not supposed to do. Do you think RBI should not have given this permission?
Let me come back to that. And that’s a very, very important point to address. So what the banks were doing was, they were essentially buying dollars onshore at a low premium, and they were selling dollars offshore at a high premium, because offshore the dollar was stronger and the rupee was weaker.
And they were benefiting from this carry trade, right? And when they were doing it, because they are buying dollars onshore, they were essentially taking a long position on the dollar onshore, that was further aggravating the depreciation pressure on the rupee. And that’s what the RBI wanted to occur.
So what the RBI told banks on March 27th is, you have to impose, basically the RBI imposed a cap of $100 million on a daily basis on all net open position taken by Indian banks in the onshore foreign exchange market. What that meant was, any position above $100 million had to be unwound. And estimates suggest that banks were carrying an outstanding open position of about $30 to $40 billion.
That was a very large position that the banks had, because of course, when the spread is widening, it was a very lucrative opportunity for the banks to exploit the arbitrage opportunity. As I said, perfectly normal trade. So then banks started unwinding the trade.
But what also happened was that when banks were given this cap, they shifted this to the corporate treasuries. They were basically trying to settle it through the corporate treasuries and doing the carry trade through that. So that’s why the rupee did not adjust much after the March 27th directive.
So then what RBI said on 1st April is that, not only is there is $100 million cap, on top of that, banks, Indian banks are banned from offering any kind of non-deliverable contract to resident, non-resident counterparties, whatever it is, essentially severing the link between the onshore market and the offshore market. And that was a pretty unprecedented and sharp measure, strong measure to take. The net result was that the banks had to unwind everything by April 10.
That was the deadline given to the banks. And the banks incurred a mark-to-market losses of anything between 4,000 to 5,000 crore rupees, which is a pretty big amount. And share prices of many large banks fell because they were taking all these MTM losses on their balance sheet.
And roughly, I think by April 10, they were able to unwind most of the positions. Now, you asked the question about, should RBI not have given permission to the banks? I think the way to think about that is, RBI did the right thing by giving banks the permission to trade in the offshore market, because this was RBI acknowledging that there is an offshore market where there is a lot of trade that’s happening in the rupees.
And it doesn’t make any sense to keep the two markets separated because that is ripe for a speculative attack on the currency because you have two different exchange rates prevailing in two markets in some sense. And that does not make any sense if you want to move towards capital account liberalisation. And most important, the RBI’s goal or the government’s goal has been internationalisation of the rupee, right?
If you want to internationalise the rupee, it makes no sense to have two different markets and the price discovery switching from one market to the other, depending upon global volatility. It makes sense to merge the two markets and have a single market of the rupee-dollar trade and let all Indian banks and entities trade in that unified market. So I would say it was a very good thing the RBI had done by allowing Indian entities to take position in the offshore market.
But now going back on that, I think is extremely damaging and we can talk about why I think that is a problem.
Puja Mehra: I also have many follow-up questions. First of all, the governor said that this is only a temporary measure, but I’m afraid hasn’t the signal gone out that as you said, that the RBI has been flip-flopping, there is policy uncertainty and that becomes a source of risk. And once investors burn their hands, they’re not always keen to return to a jurisdiction where such regulatory flip-flops take place.
So was it worth it for the RBI to do this? There could have been alternatives. There could have been alternatives where the economy could have been allowed to adjust to higher oil prices and a change in demand they could have taken place and several other things.
So one, was it worth it for the RBI to do this, even if it is temporary? And can it really be temporary? The lingering sort of signalling effect remains not just in this market, in any other market that has a regulator where that is all right with flip-flops.
Secondly, people who need to hedge their rupee positions, whether it is rupee debt, et cetera, do they have ample instruments to do that or that gets affected? And three, has speculation been appropriately and effectively curved or is it still somewhere out there hidden from the RBI’s view? Has this been an effective way of dealing with the kind of speculation they were going after?
Rajeswari Sengupta: Yeah. So let me address the first question. And first of all, these are all very good questions and very pertinent questions.
So let me first go to the point that you said about, is it worth it or was it worth it? And the one word answer that I would give is, no, it wasn’t worth it. And why do I say that?
First of all, banks are regulated entities of the RBI, right? And they were doing trades, they were taking positions because the RBI had given them the permission to do so to begin with. They were not doing anything illegitimate or illegal, right?
They were perfectly within their legit permission given. It was a perfectly normal trade that they were doing because we also have to understand banking is a business. And once you give banks permission to do this, they saw an arbitrage opportunity which they exploited.
And that is something that any business would do to make money out of it, right? So there was nothing wrong in what the banks were doing, but the banks got penalised very heavily for doing something that was not illegal, right? And the bank stakeholders also had to pay a price for it because Bank Nifty fell by close to 4%.
Some big banks’ share prices fell by more than 6%, right? So stakeholders had to take a hit the banks had to take hit on the balance sheet. And for what?
That’s the question about was it worth it? The reason it wasn’t worth it is because as I started saying in the beginning, the pressure on the rupee to depreciate is structural. It’s a fundamental reason why the rupee is depreciating and it will continue to depreciate because A, there is not enough demand for rupee assets.
There wasn’t enough demand for rupee assets even before the war began. That is something that policymakers need to think about deeper. That why aren’t foreign investors demanding rupee assets?
What has fundamentally gone wrong? Secondly, because of the war in West Asia, the import bill of India is going to go up. That means current account deficit will go up.
The balance of payments has already been in a deficit even before the war began. Now the balance of payment deficit is going to become worse because we have a widening current account deficit and a falling capital account surplus. As the balance of payment deficit widens, the only way for it to adjust is for the rupee to depreciate.
So the rupee depreciation is required for the balance of payment to balance and because of the structural pressure, India is a relatively open capital account today. We cannot prevent the rupee from depreciating. So that is sort of a futile effort.
That currency defence does not work when you have a relatively open capital account and you also have an open current account. So that’s where the question of whether it was worth it becomes clear. I call it like a quixotic quest of the RBI that you’re constantly trying to defend the rupee whenever the crisis unfolds to realise that it can’t be done but they never really seem to change the stance and it’s the same movie keeps playing out over and over again from taper tantrum to Russia-Ukraine invasion to the West Asia war.
Puja Mehra: And it’s important to say here that this time with much larger foreign exchange reserves so that can no longer be the sort of thing to say.
Rajeswari Sengupta: Exactly. And the pressure on the rupee to depreciate is also very strong because unlike the taper tantrum which was a one-time shock we don’t know when this war is going to end. We don’t know how high the current account deficit is going to go.
We don’t know how much capital outflows the foreign investors are going to take out. So the rupee needs to depreciate. So any attempt to prevent the rupee to depreciate actually makes things worse.
Now let me now come to why do I think it makes things worse. That why RBI’s measures can actually backfire let alone achieve the objective. The reason it will backfire goes back to your first question about the governor saying that these are temporary measures.
Even if they take the measures back at some point of time and they allow the banks once again what has happened and as you rightly measured is it’s a scarring of confidence. Presumably RBI took all these measures to stabilise confidence and stabilise rupee. There is no reason to believe why either of these two can be stabilised by these measures.
If anything, confidence of the foreign exchange market participants will get undermined even more as a result of this unprecedented and drastic measure. Banks, as I said, were doing something that they were allowed to do. It was a legitimate trade but now they had to take a loss and they got penalised because of that for a policy goal that has nothing to do with the banks themselves which is rupee defence.
And the signal that this sends out to the economy is if a perfectly legitimate action got banned then what else can the RBI do? What other legitimate actions can get prohibited now in order to achieve the objective of a stable rupee? For example, if I am sending my kid abroad to study I need to take some dollars and I’m going to sell some rupees but now looking at RBI I’m worried that is the RBI going to tap outward remittances?
Is the RBI going to impose capital controls on outward foreign investment? So that means any investor who wants to take money out is going to take money out now before the capital controls and outflows are imposed. Anybody who wants to send a kid abroad or meets any kind of outward remittance that needs to happen is going to do that now is going to somehow send money abroad.
So exacerbates the pressure on the rupee to depreciate because everybody has now gone into the guessing game of understanding what the RBI is going to do next. When the rupee continues to depreciate it can’t lose reserves anymore the NBF market and the forward market move is already done what else can it do, right? So that backfires because that further puts pressure on the rupee to depreciate because everybody will just scramble to take the money out before the next set of controls get imposed, right?
Rajeswari Sengupta: The other thing that you asked about the hedging, what this does is two things. One is, because of the $100 million limit on banks’ net open position in the onshore foreign exchange market, the onshore market just lost a lot of liquidity, right? And the market became very thin because of this gap.
Because the earlier limit was internally decided by banks up to 25% of the tier one capital, which could be much, much higher volumes of positions taken in the FX market. Now, you’re down to only $100 million of daily limit to be taken in the FX market. So now, for anybody who wants to hedge their exposure, the cost of hedging just went up significantly.
Importers are already facing a very high hedging cost as a result of this, because banks are no longer in a position to offer hedge. They have this limit that they have to satisfy, right? And what is worse, and I don’t know how many people are realising it, it also puts a hedging pressure in the offshore market.
Because if I’m a foreign portfolio investor, and I’m investing in rupee asset, I need to hedge my rupee exposure. But the counterparties in India are not willing to offer any kind of hedging contract, because they are going to be extremely reluctant to get into any kind of FX activity now, and they can’t. Because of the separation between onshore and offshore market, the Indian counterparties cannot offer any kind of rupee hedging to foreign portfolio investors sitting abroad, even through their related parties.
So think of it like a State Bank of India of Bombay cannot really do that counterparty transaction with State Bank of India Singapore to offer rupee hedges to a Singapore pension fund who’s willing to invest in Indian assets, which means foreign portfolio flows, which is something that we need now in order for the rupee to become stronger, that kind of hedge is also not going to be available or is going to become extremely costly, which directly discourages foreign capital inflows.
So what the RBI’s measures may end up doing is, it will encourage outflows, because everybody’s now worrying about what the RBI is going to do next. And it will discourage inflows, because hedging became much costlier and much more difficult for FBIs who wanted to invest in Indian rupee assets. And it also became costly for importers who need to hedge their exposure, because their import bill is very high and they need hedges, but their hedging costs also went up.
And that is an additional burden on the importers. So multiple ways why this can and is going to backfire because of the knee jerk reaction of the RBI.
Puja Mehra: Though I can’t help but think that is it that the RBI is on a different planet and you and I are on a different planet. Surely if we can see this, the RBI with its huge army of economists and foreign exchange experts who’ve done this their entire lives can see this. So what is really going on?
Rajeswari Sengupta: So there was a mention in a post-policy press conference meeting that this was presumably done because there are self-fulfilling expectations, which are creating disruptive volatility on the exchange rate, meaning that there is a speculative activity happening, which needs to be stopped. Now, I think what’s important to understand is when there is a market, like a foreign exchange market, which typically should be highly liquid, we need speculators to do market making and to add liquidity to the market, right? So somehow in India, speculation, even after more than 30 years after liberalisation, speculation continues to be a bad and dirty word.
If we believe speculation in a bad and dirty world, we really should not be a market-orientated economy. We should go back to a socialist, command and control, centrally planned economy. Any market-orientated economy with markets needs to have speculation because the speculators are the market makers who add liquidity on a high-frequency basis, on a minute-by-minute, second-by-second basis, right?
If you choke off speculation, if you choke off the market-licking activity, then you’re going to have very bumpy swings in the exchange rate, very large movements in the exchange rate because there isn’t enough people or there isn’t enough demand and supply in the market to equilibrate the exchange rate at a very high frequency level, right? So what’s going to happen is the price is going to adjust with very large swings. And then I think what we’re going to see is RBI coming up with more creative measures to prevent the inevitable swings from happening.
What you get is a highly distorted market, which ceases to be a market because you have a very giant participant like the central bank who’s trying to choke off every possible source of liquidity into the market. And when you choke off liquidity, you don’t have a market anymore, okay? So that’s the state that we are in, that if we don’t understand why speculation is needed, why arbitrage conditions will get exploited, then we just should not have markets, you know?
I mean, then we should go back to the good old days of centrally planned, command-and-control economy where we think markets are bad, we think arbitrage is bad, we think speculation is bad, we think profits are bad. Then that’s the choice that we have to make. But once we have decided to open up the economy in 1991 and have followed through to some extent, you have some kind of a market-determined exchange rate, so to speak, and you’re trading with the rest of the world, you just have to do what the market demands, whether it’s a volatile tile or whether it’s a peace tile.
In a volatile time, all the more, coming back to the depreciation point, the rupee needs to depreciate because there is a fundamental imbalance that has happened on India’s external accounts because of the West Asia conflict. And the only way that imbalance can be balanced is if the price adjusts. There is such a thing called the price system in any modern market economy, whether we want to deny it or not, that’s up to our own peril.
But we need to let the price adjust. And in this case, the most important price is the exchange rate. It needs to depreciate.
Why? Two reasons. When the rupee depreciates, exporters become a little bit more competitive, which is very important in the current environment, that they are able to export a bit more and earn a bit more from their sale.
That is something that they need. Imports become more expensive, which is good because Indians need to import less now because if we continue to import the previous amount at a high level of energy and fertiliser prices, our import bill will go up even further. So imports becoming more expensive is good.
Exports becoming cheaper is good. That is what is needed. Secondly, when the rupee depreciates, Indian assets become cheaper.
And for foreign investors, it becomes more lucrative to then invest in Indian assets because they become cheaper. And that is when capital inflows can restart again, or maybe as much of capital outflows will not happen. But if we keep the rupee artificially overvalued, as is apparently being tried, then all of these channels of stabilisation and adjustment fall apart.
And what we get, as I was saying, is a highly distorted market with many unintended consequences that I was listing out.
Puja Mehra: One of which, as you said, is that we are probably again going to have two exchange rates for the rupee, one onshore and one offshore. And that reminds me of a conversation somebody very senior in the IMF, an Indian economist, told me she used to work on Argentina and how Argentina had multiple exchange rates. And we were joking about it.
And I’m afraid that, you know, right now, some economists from some other country might be joking about India. So what do you think should now be done if you could be in the RBI or in government right now? What would your recommendation be?
Rajeswari Sengupta: So one thing I just wanted to clarify here, Puja, is that before 2020, it was always the case that there was an offshore market and there was an onshore market and the two were completely separated from each other. And the price discovery of the rupee would shift between the two markets, depending upon the liquidity situation, the global volatility, et cetera. Unfortunately, we have gone back to that period.
So whatever gains RBI did in the last four or five years have sort of been reversed. And now, even if the RBI brings back that kind of measure that, OK, fine, banks are once again allowed to take positions, as I was saying, because of the damage done to the confidence. Because this is like a retrospective taxation.
We know the retrospective taxation episode of Vodafone. This is exactly that. Because what the RBI did was RBI penalised banks on positions they had already taken.
At least if they wanted to do it, they could have done it on incremental positions that the banks were going to take. That means the banks would have more room to adjust. The stock market would not have reacted.
The banks would not have marked to market losses of 4,000 to 5,000 crore, because they knew that this was coming and they could have adjusted accordingly. But by doing it on positions that the banks already had, this was a retrospective taxation impact on the bank balance sheet, which is why I’m saying that the confidence damage is going to be so much longer lasting that I very much doubt, even if the RBI goes back on this, there’s going to be any kind of interest amongst the banks to take FX positions again in the offshore market or even onshore market.
So I think we have done a damage to the foreign exchange market that’s going to last longer than the war, irrespective of when the war ends. And that’s the kind of damage the Indian economy does not need. It is in the interest of India to have a vibrant and liquid foreign exchange market.
If you want to do internationalisation of rupee, Vixin Bharat, whatever the ambition may be, we just went back several years as a result of this. What could the RBI do right now? RBI could, or the policymakers could acknowledge and realise that the pressure on the rupee to depreciate is fundamental and structural.
Because of India’s structural dependence on imported energy, because we are a current deficit country, because we have been losing capital inflows even before the war, there is nothing that can be done overnight to change any of these things. India cannot stop becoming dependent on imported energy. We need to figure out why foreign investors aren’t interested in Indian assets.
That’s something the policymakers need to figure out. But in the immediate period, the RBI needs to let the rupee depreciate. RBI needs to let the rupee find its true level, whatever the level may be.
I think India is the only country where we all obsess about the exchange rate so much that on a day-to-day basis, it’s on the front page of every newspaper. I don’t think it happens in any South Korea, Thailand or Taiwan or Singapore of the world that on the front page, we have headlines like rupee has a free fall, a rupee has plunged off the cliff, or there is a psychological level of the rupee that is getting breached. I don’t even understand what is a psychological level of an exchange rate, right?
It’s a price. Do we say psychological level of the steel price? We don’t.
100 rupees to a dollar. Now, it seems it’s 95. I mean, it’s like a step function.
Every time there is a 95 or 100 or 90, there is an intervention. All of that is kind of a little bit strange, because we want to be a market-orientated economy. Why is there so much of discussion and obsession about the exchange rate?
Let the exchange rate stabilise. It is supposed to be an automatic stabiliser. It is supposed to be a shock absorber.
In bad times like this, let it depreciate so that exporters can breathe a sigh of relief. Importers cannot import as much. Foreign investors see that Indian rupee assets are cheaper.
Let that adjustment happen. And yes, when the times become good again, at some point, the war will end. The conflict will end.
Then the rupee may start appreciating again, because there is greater interest in Indian asset. That’s how a market system operates. That’s how the currency is supposed to operate.
But the longer and the more we try to disrupt that process, we are just sort of pushing away the inevitable. So I would say it’s actually not that difficult. You just let the rupee take the hit and let the rupee depreciate.
Puja Mehra: Right. Thank you. Thank you so much.
Rajeswari Sengupta: Thank you so much. This was a pleasure.
