MC EXPLAINER Why the Rupee’s losing streak is India’s winning strategy

With China reportedly considering devaluing its currency to offset the impact of higher US tariffs, it is only imperative for India to ensure that the rupee remains competitive on a relative basis. Even though one could argue that the tariff differential between Indian exports and Chinese exports to the US would not have adversely impacted India’s competitiveness in any case, it is also about staying competitive in other export destinations across the world.

India’s currency strategy in 2025 has left the rupee trailing most global peers, with just a 0.02% appreciation against the US dollar in the first half of the year—even as nearly all developed and emerging market currencies strengthened (or more precisely, the dollar depreciated against them). Now, is that good or bad? At the heart of this seemingly paradoxical performance lies the Reserve Bank of India’s (RBI) informal currency management regime: keeping the rupee stable not just against the dollar, but against regional currencies—especially the Chinese yuan.

Benchmarking to the yuan

India’s central bank has long followed a multi-currency reference framework, but in 2025, the yuan’s weight in this calculus may have gone up. And that’s no coincidence. China is India’s second-largest trade partner after the United States, with bilateral trade of $127 billion in FY25—of which exports stood at $14 billion and imports at a whopping $113 billion.

With China reportedly considering devaluing its currency to offset the impact of higher US tariffs, it is only imperative for India to ensure that the rupee remains competitive on a relative basis. Even though one could argue that the tariff differential between Indian exports and Chinese exports to the US would not have adversely impacted India’s competitiveness in any case, it is also about staying competitive in other export destinations across the world.

India now competes head-on with China in global markets across textiles, machinery, chemicals, and electronics. So keeping the currency competitive isn’t just smart—it’s necessary. In sectors like engineering goods, textiles, and low-end electronics, a stronger rupee vis-à-vis the yuan could swing demand away from Indian manufacturers.

Moreover, in a world where supply chains are realigning, India wants to be viewed as a credible alternative. Since India doesn’t have a domestic market large enough to absorb scale on its own, global companies can view it as a sourcing hub only if a substantial share of production can be exported. But that ambition falls apart if the currency turns too strong.

In that sense, there’s a quiet currency war underway—India is trying to shield its export competitiveness, especially in labour-intensive and price-sensitive sectors, from being undermined by China.

Another dimension to this is also the impact on the domestic industry. If the rupee gets too strong against the yuan, we risk everything from Ganesha idols to umbrellas flooding Indian markets from China. If the rupee stays in check, the spillover largely remains confined to pharmaceutical ingredients, chemicals, and steel—where dependency still runs high.

The RBI’s actions thus reflect a deliberate policy choice. They’re less focused on the rupee’s absolute level against the dollar and more attuned to its relative competitiveness against China, as also other regional competitors.

This isn’t a new trend—the Indian rupee has been steadily weakening against the Chinese yuan since 2018, having lost about 18 percent. Even more, India’s real effective exchange rate (REER), now at 101, has fallen dramatically from 108 levels in November 2024. REER is an index that measures the value of the Rupee against a basket of 40 major currencies, adjusted for inflation differences.

Central bank’s silent intervention

The RBI’s strategic intent is clearly seen in its market activity. According to the latest RBI bulletin, the central bank was a net seller of $1.66 billion in the spot forex market in April 2025. In fact, the RBI has sold an estimated $8–9 billion on a net basis between January and June 2025—quietly absorbing dollar inflows to prevent the rupee from appreciating.

Some economists argue that the rupee should be allowed to depreciate even more to enhance India’s competitiveness.

It’s a tightrope walk. And a tricky one at that.

For India runs a current account deficit, meaning we spend more than we earn in foreign trade. And this is because crude accounts for a third of our imports. So when the rupee depreciates, it only increases our import bill.

What’s helped the RBI manage this balancing act so far is the relatively stable crude oil price. Prices largely remained in a comfortable range through H1 2025, barring a brief spike during the Israel-Iran conflict, which pushed rates up by 10%.

For other economies like China, Vietnam, or Malaysia, which run a current account surplus, currency management is less tricky.

But the good part is, currently, India’s foreign exchange reserves remain robust at over $698 billion, giving the central bank enough elbow room to manage the currency on its own terms.

So, while it may appear on the surface that the rupee is underperforming—ranking among the bottom five global currencies, even as the Brazilian real (13.73 percent), Thai baht (4.99 percent), and South Korean (8.77 percent) won appreciated —it’s not bad news at all.

There is one hitch, though: a weak currency doesn’t sit well with equity markets. For foreign investors deploying capital into Indian assets, a depreciating rupee chips away at their local-currency returns. If the rupee weakens 3–4% annually—as has often been the case—their net returns are reduced to that extent. And at a time when many foreign investors feel Indian equity valuations are stretched, a weak currency doesn’t help improve the return math.

So, for all the textbook correlations often quoted about markets tracking fundamentals, reality suggests otherwise—a strong economy doesn’t guarantee a strong currency, just as a good company doesn’t always make for a great stock.

The silver lining? A weak currency doesn’t signal a weak economy. And the absence of foreign investors doesn’t imply a lack of demand.

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