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Gurumurthy, ex-central banker and a Wharton alum, managed the rupee and forex reserves, government debt and played a key role in drafting India's Financial Stability Reports.
December 31, 2025 at 8:31 AM IST
For much of India’s post-reform history, a weakening rupee was treated as a developmental virtue. Depreciation was export-friendly, growth-supportive, and when reforms disappointed, comfortingly available as a macroeconomic shortcut. That instinct has not disappeared. It has merely been repackaged.
Most recently, Abhishek Anand, Josh Felman and Arvind Subramanian have argued that India should allow, even engineer, a decisive rupee depreciation, potentially to ₹100 per dollar, to restore competitiveness and revive manufacturing-led growth. Their argument is internally coherent within a particular development model. The problem is that this model increasingly misdescribes the structure of today’s Indian economy.
The central premise behind calls for depreciation is familiar: India has tolerated real appreciation for too long, undermining exports, especially labour-intensive manufacturing. Restore price competitiveness, the argument goes, and export volumes will respond.
This view is dated.
Manufacturing exports today are heavily import-intensive. Electronics, chemicals, pharmaceuticals, automobiles and machinery depend on imported components, capital goods and energy. When the rupee weakens, input costs rise quickly, neutralising much of the apparent price advantage. Depreciation redistributes margins within the supply chain; it does not reliably expand volumes.
Services exports, which account for most of India’s export dynamism, are even less responsive to exchange-rate movements. IT and business services are driven by skills, scale, reputation and long-term contracts, often priced in dominant currencies. A move from 90 to 100 is unlikely to alter global sourcing decisions. Bilateral exchange-rate elasticity in services trade is often weak or statistically insignificant, particularly in services-led economies.
This is not a rejection of exchange-rate theory. It is a recognition that for India today, the empirical link between depreciation and export performance is weak, unstable and frequently overstated.
India is not a low pass-through economy. Exchange-rate movements still matter for domestic prices and not merely through fuel.
Energy, fertilisers, edible oils, electronics, pharmaceutical intermediates and capital goods remain import-dependent. A weaker rupee feeds into inflation with a lag, but once it does, it tends to persist. In a consumption-led economy with informal yet responsive wage dynamics, depreciation functions as a regressive tax, hurting households well before it helps exporters.
A deliberate move to ₹100 would almost certainly push inflation above target for a sustained period, forcing tighter monetary policy and offsetting any competitiveness gains. The macro arithmetic is internally inconsistent.
Inflation is not a side effect of depreciation. It is the constraint.
The China Analogy Fails
This is a category error.
China today faces a fundamentally different problem: entrenched excess capacity and domestic deflation. Years of investment-heavy growth have left large parts of Chinese industry operating below capacity, compressing margins and pulling prices down. In that context, currency depreciation acts as a release valve — an attempt to export surplus production and arrest deflation.
India faces no such condition. Its constraints are not excess capacity, but insufficient scale, logistics bottlenecks, regulatory uncertainty and capital costs. India is not trying to offload idle factories onto the world. It is trying to build them.
There is another asymmetry. China resisted depreciation for long stretches in the past, accumulating credibility, external surpluses and policy space. That history gives it leeway today, however contested, to tolerate some currency adjustment without immediately unanchoring expectations.
India does not enjoy the same configuration. Its macro framework rests on inflation targeting, capital-flow management and financial stability in an open economy. A large, policy-endorsed depreciation would not be read as fine-tuning. It would be read as a regime signal.
Finance Dominates Adjustment
The Anand–Felman–Subramanian framework implicitly assumes that trade channels dominate macroeconomic adjustment. In today’s India, financial channels dominate. Foreign portfolio investors set marginal prices in equity and bond markets. Indian firms borrow abroad. Hedging costs, valuation effects and capital-flow volatility directly shape domestic financial conditions.
In such an economy, depreciation is not a relative-price tweak. It is a statement of intent.
A move to ₹100 would not be interpreted as a one-time calibration. It would reset expectations. Markets would ask: if 100 is acceptable, why not 110? Hedging costs would rise structurally. Risk premia would widen. FX demand would be front-loaded. Instead of anchoring expectations, a large step depreciation would de-anchor them.
India’s large foreign-exchange reserves are often cited as justification for encouraging a weaker rupee. This reverses their purpose.
Reserves are not accumulated to underwrite a preference for currency weakness. They exist to prevent disorderly adjustment in a financially integrated economy, to smooth volatility, anchor inflation expectations and stabilise financial conditions during global shocks.
Precisely because India faces no balance-of-payments constraint, it does not need large exchange-rate adjustments to restore equilibrium. Countries devalue sharply out of necessity, not choice. Choosing depreciation in the presence of ample reserves would be read not as realism, but as intent, resetting expectations, raising hedging costs and widening risk premia.
Reserves give India the luxury of avoiding bad choices, not the justification to make them.
India’s growth strategy is explicitly investment-heavy: infrastructure, manufacturing capacity, energy transition and urbanisation. In this setting, depreciation raises the cost of capital precisely when India needs it lowest, by increasing the rupee burden of foreign borrowing, raising hedging costs and pushing up risk premia.
Countries do not industrialise by making capital structurally more expensive.
India has experienced multiple episodes of real depreciation over the past decade. None produced a sustained manufacturing breakout. Repeating the same adjustment more aggressively is not strategy; it is persistence of belief.
This is not an argument for fixing the rupee or resisting market-driven movements. It is an argument against treating depreciation as a development strategy.
Currency weakness is no longer competitiveness.
It is deferred inflation, higher capital costs and avoidable macro risk.
The rupee does not need to be cheap.
It needs to be credible.
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