NEW DELHI
:
Finance and revenue secretary Tuhin Kanta Pandey emphasized on Monday that the Indian rupee remains a free-floating currency and the government is not alarmed by exchange rate fluctuations, which are driven by cross-border capital flows.
This comes as the rupee tumbled to a record low of 87.29 against the US dollar, dropping 67 paise in early trade, following fresh tariffs imposed by US president Donald Trump, sparking fears of a broader trade war.
“Currency volatility is an issue that the RBI (Reserve Bank of India) looks into, but otherwise, it is a free-floating system. See, there will be such episodes where when something is there,” Pandey told Mint, referring to external events, adding that capital outflow will have an impact on exchange rate.
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When asked about his concerns over the rupee’s sharp depreciation, Pandey reiterated his confidence in the system but acknowledged the risks of imported inflation and rising import costs.
“It will have impact on exports also. Exports will become more attractive. My point is that you know exchange rate management is RBI’s field. If there is an excessive volatility, the RBI handles it. But it’s also a free float system. We are not into a controlled exchange rate regime,” Pandey said.
External pressures and domestic growth
The sharp decline in the rupee follows Trump’s 25% tariffs on imports from Mexico and Canada, along with a 10% levy on Chinese goods and Canadian energy, fuelling uncertainty in global trade. Indian officials have flagged external economic headwinds as a potential drag on domestic growth.
The Economic Survey 2024-25, presented in Parliament on 31 January by chief economic advisor V. Anantha Nageswaran, underscored the risks posed by sluggish global trade growth and increasingly protectionist policies in major economies. The report emphasized the need for India to prioritize domestic economic growth through deregulation and private investment, especially as the global tide of free trade recedes.
“The value of rupee is market-determined, with no target or specific level or band,” the survey had said, adding that various domestic and global factors influence the exchange rate of rupee, such as the movement of the dollar index, trends in capital flows, level of interest rates, movement in crude prices, current account deficit, among others.
Despite recent depreciation, the rupee has outperformed several global currencies in FY25. As of 6 January, the Indian unit had weakened by just 2.9%, faring better than the Canadian dollar (–5.4%), South Korean won (–8.2%), and Brazilian real (–17.4%).
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The survey attributed much of the rupee’s decline in 2024 to a strengthening US dollar, driven by geopolitical tensions in the Middle East and uncertainty surrounding the American presidential election.
