Mumbai is getting to hear two confusing messages from Delhi. One is of panic over the depreciating rupee – what is RBI doing with such huge reserves. The other is – no need to intervene, let the rupee find its floor. Both are fraught with risks
There is some panic about the falling rupee in a section of Delhi, the country’s capital, which makes policy. Such nervousness generally gets amplified when transmitted to Mumbai, the city which makes and regulates financial markets. A week or ten days back, a discussion paper by the Reserve Bank of India captured this phenomenon just perfectly: to address Delhi’s anxieties, the RBI proposed ideas to control dollar outflows, which did well only to alarm everyone.
The RBI is learnt to have proposed disallowing resident individuals from sending money abroad for buying real estate and shares, overseas direct investment, opening bank accounts, and giving loans to NRI relatives under the Liberalised Remittance Scheme (LRS). Further, the LRS limit for all current account transactions, including overseas travel, but excluding health and education, may be reduced to $50,000 a year from $2,50,000 a year, it has suggested.
It is a drastic measure, and a typical bureaucratic response to a situation when there are no easy and quick solutions. Put very simply, a fall in rupee can be stemmed either by strong dollar inflows or by rationing dollar outflows. Given the flux in the global financial markets, foreign investors are not necessarily queueing up to invest in India. And strong macroeconomic fundamentals alone do not guarantee robust FDI or FPI inflows.
So, RBI thinks restricting dollar outflows, which is under its control, can help – after all, LRS remittances in 2025-26 stood at roughly $29 billion dollars. The rupee is depreciating, and fast. In the last 12 months, it has fallen by almost 7% to 94.95 from 88.84 against the US dollar. This matters because it makes imports expensive. So, a barrel of crude oil valued at $100 will now cost Rs 9,495 compared with Rs 8,884 a year ago.
Similarly, gold. It makes foreign travel and education too expensive. To save dollars and arrest the rupee fall, the PM exhorted people to cut fuel consumption, avoid gold purchases, and postpone overseas travel to save dollars. Dampening the demand for dollars bodes well for the rupee. On its part, the RBI sold dollars, or bought rupees, to shore up its value. It also hiked the key policy rate; higher interest rates make rupee assets like bonds attractive for foreign investors, and facilitate its appreciation.
But nothing really helped. The market continues to bet the rupee will fall. The global storm: Why India finds itself in a tight spot Crude oil prices have topped $115 a barrel, and there is no respite from the two wars — Russia-Ukraine and Israel/ US-Iran. US President Donald Trump is difficult, and China strategically leverages its dominance in manufacturing, rare earths, electric vehicle batteries, solar panels, etc, while dealing with India and others.
All this has kept most countries on tenterhooks, and markets hate uncertainty. Meanwhile, the US government continues to borrow, leading to rising yields, making the greenback attractive relative to other currencies. The difference in yields between 10-year US bonds (about 5%) and Government of India bonds (about 7.5%) is probably at its two-decade low of 2-2.5%. What this means is foreign investors would rather invest in US bonds since they do not have to worry about rupee depreciation or inflation.
Further, US companies in the Artificial Intelligence space and building large language models are attracting whatever remaining dollar is available. India, unfortunately, does not really have any AI play. So, along with other emerging markets, it finds itself in a difficult situation. Growth is robust, inflation is under control, and the government is fiscally prudent. Lacklustre private sector investment, stagnant wages and lack of enough jobs continue to be sentiment dampeners.
RBI is estimated to have sold $75-80 billion during June-October defending the rupee. Its outstanding net forward sales (contracts to sell dollars on a future date at an exchange rate agreed upon today) stood at $239 billion in September end. At $720 billion, foreign exchange reserves are comfortable. More cushion is always better. Mumbai is getting to hear two confusing messages from Delhi. One is of panic over the depreciating rupee – what is RBI doing with such huge reserves.
The other is – no need to intervene, let the rupee find its floor. Both are fraught with risks. And, what is surprising is that the institution of RBI has reacted to Delhi in the most possible defensive manner. Curbing LRS outflows may result in spreading the panic further than stabilising the rupee. What the market is looking for is probably credible communication that acknowledges the vulnerabilities – that, like many other countries, India is also caught in a global capital vortex. It would be happy with a near-term coherent strategy. The writer is Managing Editor, The Indian Express. Off the Record is a fortnightly column
