Persistent pressure on the rupee from high energy import costs, foreign portfolio outflows and global uncertainty has refocused policy attention on exchange rate stability. The Reserve Bank of India has intervened in foreign exchange markets, acted to curb speculative positions and manage dollar demand, while government measures have sought to attract foreign capital, strengthen domestic production and expand export potential.

Such measures can ease immediate pressure, but cannot permanently offset structural weaknesses in the balance of payments. The deeper challenge is to sustain high growth while reducing recurring dependence on volatile external financing. This requires strengthening the sources of India’s external resilience and shifting the policy focus from defending the rupee under stress to reducing the conditions that repeatedly place it under pressure.

Exchange rate policy must distinguish currency stability from currency strength. A stable nominal exchange rate does not necessarily imply sustained competitiveness, just as depreciation does not automatically improve exports. The appropriate objective is a market-determined rate that reflects fundamentals, absorbs legitimate adjustment and remains resilient against disorderly volatility. The RBI can support this through credible monetary policy, adequate reserves and effective market functioning. Government policy must address the underlying drivers of foreign exchange demand and supply, including productivity, energy dependence, export capability, investment quality and growth financing requirements.

Competitiveness also depends on whether domestic firms can respond to currency movements. Depreciation may raise export margins, but its effect can be muted when production relies on imported inputs, contracts are priced in foreign currency, or firms lack capacity to expand supply. Productivity, logistics, quality certification and predictable trade procedures, therefore, influence how exchange rate changes translate into actual receipts over time. Currency adjustment is most useful when businesses can respond to price signals rather than merely absorb higher costs.

Growth Vulnerabilities
The central difficulty is that expansion generates demand for imported energy, machinery, technology and intermediate goods, while export earnings may not grow sufficiently or predictably to offset these payments. Imports are not inherently a weakness; imported technology and components can raise productivity and competitiveness. Vulnerability arises when the foreign exchange required to sustain growth persistently exceeds the economy’s capacity to earn it. Policy must therefore examine not only the pace of growth, but also its ‘forex intensity’, that is, how much additional external financing is needed to generate each increment of domestic output, and how much recurring foreign exchange that output subsequently produces.

This perspective calls for a discerning industrial and export strategy. Gross exports alone can overstate an economy’s external contribution when a significant share of their value depends on imported inputs. India should deepen commercially viable capabilities in engineering, components, design, research, testing and specialised services. Export incentives should be assessed against additional exports, domestic value added, productivity gains and net foreign exchange contribution. The objective is not indiscriminate import substitution, which can raise costs and undermine competitiveness, but globally competitive capabilities that allow Indian firms to retain more value while participating in international production networks.

Energy security is integral to exchange rate resilience. Oil price shocks raise the import bill precisely when geopolitical uncertainty may weaken capital inflows. Supplier diversification is necessary but does not remove exposure to global prices. Energy efficiency, renewable generation, storage, grid reliability, electrification and industrial modernisation can reduce the foreign exchange required for a given level of output. Major public and industrial projects should, where material, account for life-cycle exposure to imported fuel, equipment, licences and replacement components. The objective is not complete self-sufficiency, but lower sensitivity to external price shocks.

External Resilience
Foreign investment requires similar discrimination. Gross inflows and announced commitments do not necessarily translate into durable external strength. Investments differ in export potential, domestic supplier linkages, technology transfer, profit-repatriation requirements and future foreign exchange obligations. India should assess investment quality through three complementary questions: Does it create additional productive capacity? Does it develop domestic technological and industrial competence? Can its longer-term external earnings reasonably support its associated payments? These considerations should guide incentive design, not become rigid admission tests. Predictable taxation, reliable infrastructure, faster dispute resolution and transparent exit arrangements may attract more durable capital than temporary concessions. Existing investors should also be encouraged to reinvest and expand productive capacity.

The composition of external financing matters as much as its volume. Portfolio investment deepens markets and diversifies funding, but can reverse rapidly during global shocks. India should broaden access to longer-duration finance through stronger corporate bond markets, credible insolvency resolution, investable infrastructure assets and predictable settlement and hedging arrangements. This is not an argument against portfolio flows; it is a case for ensuring that growth is not excessively dependent on funding that can leave faster than productive capacity can adjust.

Internationalisation of the rupee can complement this strategy by reducing transaction costs and facilitating trade settlement in suitable bilateral corridors. Yet invoicing trade in rupees does not eliminate an external liability if counterparties cannot use or exchange accumulated balances efficiently. Wider international use depends on credible institutions, accessible financial markets, reliable convertibility arrangements and sustained commercial demand for Indian goods, services and assets.

These priorities require coordinated action across trade, industry, energy, investment and financial policy, while preserving the RBI’s operational independence. Reserves provide insurance against external shocks, but cannot substitute indefinitely for recurring foreign exchange earnings. India’s objective should be an economy whose growth requires progressively less emergency external financing and whose earnings are more diversified, recurring and resilient. The decisive transition is from managing episodes of rupee weakness to reducing the structural conditions that make them disruptive.

(This is the first of a two-part series by the author. Part 2 will explore how India can assess whether its growth model is progressively becoming more resilient to external shocks.)