A stable currency seems reasonable to have until it suddenly does not. Commentators who had cheered the Reserve Bank of India’s policy of keeping the rupee rock-steady seem to be waking up to the fact that stability entails costs. Topping this costs list is overvaluation – the 40-country Real Effective Exchange Rate in November, a measure of its competitiveness vis-à-vis trading partners and competitors, was at 108.12 compared with 104.72 a year ago. A simple interpretation is that a combination of inflation (higher than peers) and a stable currency blunted its export edge by a good 3% over just one year.Despite these obvious problems, what lured the RBI into holding the currency stable in 2023 and much of 2024? For one, it kept imported inflation in check at a time when global inflation was riding sky-high on the back of COVID-related supply disruptions, the Ukraine war and the conflict in Gaza. Oil prices were volatile and had moved up to a substantially higher range of about $20 more for a barrel of Brent crude than in the pre-COVID period.
.png)
