‘Volatility happens’: RBI Governor plays down rupee fall as currency breaches 90

“Our effort has always been to reduce any abnormal or excessive volatility, and that is what we will continue to endeavour… in our external sector — as I also mentioned in my statement, is very strong going forward — we do believe that we are having sufficient reserves,” he said. A 5 per cent depreciation leads to 35 bps rise in retail inflation, he added.

The RBi governor said the current account is very manageable, at about 1per cent or so. Given India’s strong fundamentals, we should get good capital flows going forward. “So, I think we are in a very comfortable situation insofar as the external sector position is concerned,” Malhotra said.

The rupee, which crossed 90-mark again mid-session on Friday, recovered marginally and closed at 89.95. The benchmark BSE Sensex was up 447 points to 85,712.37.

On the external front, services exports are likely to remain strong, while merchandise exports face some headwinds, Malhotra said. “External uncertainties continue to pose downside risks to the outlook, while speedy conclusion of various ongoing trade and investment negotiations present upside potential,” he said.

RBI ignored rupee fall

The RBI looked past the rupee’s slide while lowering interest rates on Friday since it does not see the currency’s movement as a threat to the broader economic picture. For the central bank, inflation remains the core mandate. With price pressures sitting well below the lower end of the RBI’s comfort zone, the domestic backdrop clearly supported a rate cut. Over the past several months, headline inflation has eased steadily, underlying momentum has softened. There is little evidence that the weaker rupee is spilling over into generalised price increases.

The RBI’s approach to the exchange rate has remained unchanged — it steps in only when volatility turns excessive, not to protect a particular level. The recent rupee depreciation, though sharp on paper, has largely unfolded in an orderly manner, reflecting global factors instead of local stress. With currency markets functioning smoothly, the RBI sees no need to tighten monetary policy merely to signal support for the rupee.

To be sure, from slowing government spending to uncertainty over global trade, growth risks have begun to surface. A timely rate cut can cushion demand without endangering price stability. Ultimately, it was the comfort on inflation, not the rupee’s trajectory, that shaped the policy decision.

The rupee’s recent decline is not unusual. Exchange rate movements of a majority of developing countries also show a similar trend. “This is due to several factors including high inflation, large trade deficits, limited foreign flows and vulnerabilities to external shocks including financial system and commodity price risks,” said a Bank of Baroda research report.

According to Aditi Gupta, Economist, Bank of Baroda, between 2010-2024 (calendar year), on a point-to-point basis, the rupee has depreciated 13 times, losing about 48 per cent of its value. Even narrowing the range to the last 10 years, it was only in 2017 that the currency appreciated. The average rupee depreciation during the period is 2.9 per cent. To be sure, in 7 out of the 10 years, the actual depreciation was lower than the average.

Barring 2018 and 2022, the exchange rate movement has largely been within the long-term average trend. Last year, the rupee depreciated by just 2.8 per cent, notwithstanding a 7 per cent rise in the US dollar’s value. This year the situation is quite different. The rupee has depreciated by over 5 per cent since December 31, 2024, even as the dollar has weakened, Gupta said.