₹ headed to 100? Why psychological red line matters

The International Monetary Fund (IMF) has stated that India is robust enough to endure the pressure on the rupee. An IMF spokesperson commented that the Federal Reserve's decision to increase interest rates would contribute to tighter global financial conditions, enabling the exchange rate to act as a shock absorber. The rupee has declined from ₹96 to the dollar due to high US Treasury yields, oil prices, and foreign portfolio outflows that have strengthened the dollar.

Allowing some depreciation is not merely beneficial for exporters; it is also about preventing the cost of using reserves and increasingly complex measures to maintain a level that might no longer reflect India's external conditions. The critical question is determining where to draw the line between necessary adjustment and an uncontrollable decline.

The IMF does not advocate abandoning the rupee; rather, its argument does not imply leaving the rupee entirely to market forces. The IMF believes India enters this period with strong growth, an inflation-targeting framework, healthy corporate and financial-sector balance sheets, and substantial external buffers. The IMF has been making a similar case for some time, stating that exchange-rate flexibility should be the primary shock absorber, with intervention restricted to periods of destabilizing risk premiums.

The strongest argument for rupee depreciation lies in the current pressure, primarily due to oil prices. India imports nearly 90% of its crude oil, so sustained rises in oil prices worsen the trade balance and increase the demand for dollars. With high US yields, foreign outflows, and oil price increases collectively negatively impacting the rupee, the case for allowing depreciation becomes apparent.