A currency is a two-sided instrument. In the case of the Indian rupee-U.S. dollar exchange rate, the demand for the rupee has been overwhelmed by the demand for the dollar and a loss of competitiveness over the two years that the Reserve Bank of India has maintained a de-facto peg to the dollar.
Now, with the rupee trading at or near all-time lows and the Reserve Bank of India’s real effective exchange rate at all-time lows, the 2022-2024 de-facto exchange rate peg maintained by the RBI has ended.
Read RSM’s outlook for the global economy in 2025 in the latest issue of The Real Economy.
The end of that regime has resulted in the drop in the long-term value for the rupee, with swings in the rupee’s value adding to the drop in demand for India’s financial and physical assets.
This change will bolster the balance sheets of firms—both industrial and service based—as the rupee depreciates.
And the decline is not over, as the forward market projects a further 14.7% depreciation of the rupee over the next five years.
Given the growing importance of India in the global economy as foreign firms shift operations there to control costs and improve productivity, policy changes in India require monitoring.
The de-facto exchange rate regime and rupee-dollar bilateral spot rate are expected to play a much larger role in global finances in much the same way that China did starting in 2010.
