Today, the rupee is weakening due to multiple triggers. Firstly, the dollar index itself has rallied. Between Sep-24 and Jan-25, the dollar index (DXY) has gone up from 100 to 109.40 levels. Secondly, China is weakening the Yuan, preparing for tough US sanctions. That is putting pressure on the rupee too. FPI flows are outward and that is adding to the strain on the rupee. In addition, the NDF (non-deliverable forward) market for rupee is seeing consistent short selling in the INR, putting pressure in alien markets. 

In the last 2 months, RBI has depleted its forex reserves by over $80 billion, but the rupee still weakened by over 4% in this period. The problem is that the spot dollar intervention is just too spasmodic and lacks conviction. The RBI tends to intervene around critical levels and then just lets it go. That does not work for the Indian rupee. That sort of strategy worked in normal times. This is not a normal situation and the RBI is finding itself in a Catch-22. Either ways, it could be wrong, but that is a bet that the RBI will have to make. There are 2 key decisions to be taken by the RBI. 

It is not that the rupee has gone weak only against the dollar. Between Sep-22 and Dec-24, the rupee weakened from ₹87/£ to ₹108/£. The message to go out from the RBI must be that the central bank is willing to go all out to defend the rupee. Today, that message is not coming out clearly and that allows traders to speculate against the rupee. Giving a tough message is the best way to break out of the Catch-22. A good example is the way Dr Raghuram Rajan handled the currency crisis. It combined dollar selling, NRI deposit incentives and planned intervention by the RBI in the NDF and in the hedging markets. That had an impact. Not only did the rupee recovery rapidly, but also foreign flows came back into India with vengeance. 

Apart from concerted and visible action on the forex front, there is the need for cutting rates. Higher rates is not getting us additional flows and lower rates will not spike inflation. India must stop the templated approach to monetary policy and take a fresh look. India needs real growth above all else, and once that comes, all other problems will be sorted out. More importantly, it is essential that the RBI governor is seen, heard, and understood. Rupee volatility is par for the course and it is due to the factors beyond RBI control. The key is to have a concerted plan of  action in place!