Let's face it. 50 is not 25. The way currency depreciation could work to India's advantage at a 25% US tariff rate is no longer viable at 50%. In fact, the rupee can be called upon to do other things now other than chase competitiveness.
In the good old days before August 6, when 25% US tariff on Indian goods exceeded the average on Asian competitors by roughly about 5%, exchange rate depreciation could have bridged the gap. For exporters, a fall in currency is a counter-tariff. It makes Indian goods cheaper to buy in the tariff-imposing country and, thus, counters the effect of a tariff. Assuming that our exporters compete with peers in the region, and not directly with US producers, the loss in our price-edge could be measured as the difference in tariffs on us versus rate imposed on Asian economies.
The rupee seemed to be doing exactly that before the 'buying-Russian-oil' penalty. Measured on August 4, the rupee had depreciated by about 4% since April against a basket of our Asian peers. A little more could just be what the doctor ordered.
The additional 25% penalty threw that playbook out of the window. Letting the rupee depreciate further - or perhaps even devaluing it to help India exporters - is not an option. Let's not forget the fact that India runs a trade deficit and imports more goods than it exports with a gap of roughly $20 bn a month. A hefty depreciation would increase import costs significantly.
Besides, a large uncontrolled depreciation would tend to scare capital flows away. The attractiveness of assets like stocks or bonds that foreign investors invest in, depends on the dollar returns they earn. Depreciation erodes this. A rupee of capital gains on Indian stock is less in dollar terms every time the rupee loses value.
So, how should the rupee be managed? The first step in arriving at a currency strategy is to do a quick check of the market and business sentiment. That certainly does not look encouraging.
Tariff fears have combined with concern about lack of private investments, future of Indian IT, impact of automation on manufacturing, lack of credit demand, and so forth, to create an atmosphere of gloom, if not panic. The phrase, '1991 moment', a reference to India's infamous balance of payments crisis, is quietly entering the economic discourse. FPIs, net sellers through the year, have stepped up their sales.
In times like this, the rupee becomes an important signal of India's economic resilience. RBI has been intervening systematically in the markets, selling dollars to prevent a sharp drop in the rupee. In the week ending August 1, its forex reserves dropped by $9.3 bn, a rough gauge of the amount of intervention. It is likely to have stepped on the gas after August 6.
With roughly 11 months of imports worth of reserves, it can do a lot more. This does not mean holding a particular level for the exchange rate. More depreciation could well happen. But it should happen in a calibrated manner with RBI signalling that it's firmly in charge.
What about long term? Erratic US policy should give de-dollarisation of trade a leg-up. India could take the lead in settling trade in bilateral exchange rates with trading partners, starting with BRICS economies. This needs hard work by central banks and market makers like commercial banks. Put simply, we need markets that directly determine the rupee-Brazilian real, or the rupee-renminbi, exchange without the dollar as an intermediary.
Should India give up its purchases of Russian oil? Hard numbers suggest that India does not gain a whole lot by buying Russian oil. Going by HDFC Bank's August 4 report, 'Tariff Impact: Relative Rupee Depreciation to the Rescue', India's average price of Russian oil purchases was about $4 a barrel less than the average price that other oil producers charged in 2024-25. About 36% of its oil needs was serviced by Russia. The report estimates that if India had bought no oil from Russia, its import bill would have been higher by only $3 bn.
The bottom-line - stopping Russian oil purchases is unlikely to cripple the Indian economy. This is where economics ends, and strategic considerations take over.
How much would an attempt to make nice with America by switching Russia's oil pipeline off cost in terms of our geopolitical standing? Since we buy a lot of military equipment from Russia, could it significantly compromise our defence needs? Would this be seen as capitulation that encourages more US weaponisation of tariffs against us? Economists do not have pat answers to this. Let our foreign policy experts decide.
What economists would certainly advise is to use this threat as an opportunity to set our own house in order. Despite improvement in ease of doing business in India, domestic businesses still complain of excessive regulation, kinks in import duty structure and an occasionally unfriendly taxman. Small farmers still stand to gain considerably from getting direct access to end-buyers. Sorting these out might just be as important as successful tariff negotiations.
Source Name : Economic Times