Cholleti
The Indian rupee is becoming the ‘sacrificial lamb’ in the Reserve Bank of India’s (RBI) tough balancing act. This is because of a basic economic rule called the “impossible trinity” (or macroeconomic trilemma). It says a country cannot have all three things at the same time:
1. Independent control over its interest rates (monetary policy) to manage the economy.
2. Free movement of money in and out of the country (open capital flows).
3. A stable exchange rate for its currency (no big ups and downs in the rupee’s value against the dollar).
India wants all three, but it is impossible. Something has to give. Right now, the RBI is choosing to let the rupee weaken rather than lose control over other goals.
Why Is the Rupee Under Pressure?
As of early February 2026, the rupee is trading around 90.3 to 90.5 against the US dollar. It has weakened a bit in recent months, though a recent US-India trade deal gave it some temporary support. The currency has seen ups and downs, sometimes nearing 92, but the RBI steps in to prevent sharp falls.
The RBI wants low interest rates. Lower rates make it easier for businesses and people to borrow money, spend, and help the economy grow. India is aiming for strong GDP growth of around 6.8–7.2 per cent this year.
It also wants foreign investors to keep bringing money into India. This helps fund growth, build factories, and support projects like ‘Make in India.’
At the same time, the RBI tries to keep the rupee stable so imports (like oil and electronics) do not become too expensive, which could push up prices and inflation.
But these goals clash. If the RBI keeps interest rates low to boost growth, it makes Indian bonds less attractive to foreign investors compared to higher-rate countries like the US. This leads to money flowing out, putting downward pressure on the rupee.
The Big Problem: Heavy Government Borrowing
The Union Budget for 2026-27 (presented in February 2026) makes things harder. The central government plans to borrow a record Rs 17.2 lakh crore (gross borrowing) for the year starting April 2026. This is 17 per cent more than the previous year.
When you add state government borrowing, the total could reach around Rs 30 lakh crore. So much borrowing floods the market with government bonds. This keeps bond yields (interest rates on government debt) high. High yields mean the government pays more to borrow, and it becomes harder for private companies to borrow cheaply.
To control these high yields, the RBI often buys government bonds. Buying bonds puts more rupees into the banking system (increases liquidity). But more rupees in the system can weaken the currency further, as there is more supply of rupees chasing dollars.
On the other hand, to defend the rupee and stop it from falling too much, the RBI sells dollars from its reserves and takes rupees out of the system. This tightens liquidity and can push interest rates up – the opposite of what the government wants for growth.
The RBI cannot keep doing both forever. It cannot pump in rupees to control bond yields and suck out rupees to protect the rupee at the same time.
Why Let the Rupee Weaken?
Allowing the rupee to fall slowly seems like the least harmful choice right now. The RBI does not target a fixed level for the rupee. Instead, it steps in only to avoid wild swings (volatility). Governor Sanjay Malhotra and experts say the focus is on managing inflation and supporting growth, not defending an exact exchange rate.
A weaker rupee has some benefits:
It makes Indian exports cheaper and more competitive abroad. Sectors like IT, medicines, textiles, and manufacturing get a boost.
Exporters earn more rupees for each dollar they bring in.
It can help narrow the trade deficit over time.
Remittances from Indians working abroad become worth more in rupees.
A moderate depreciation (say 5 per cent) adds only a small amount to inflation (15–25 basis points), and India’s foreign reserves are strong enough to handle it. External debt is low, so the country is not too vulnerable.
But there are real downsides:
Imports get costlier – oil, electronics, machinery, and raw materials rise in price.
This pushes up fuel costs, transport, and everyday goods, hurting ordinary people’s budgets.
Companies with dollar loans face higher repayment costs in rupees.
Students studying abroad or people traveling overseas pay more.
If the rupee falls too fast or too much, foreign investors may pull out more money, creating a bad cycle.
What Experts and the RBI Say
As many economists expected, the RBI kept interest rates steady in its February 2026 meeting (repo rate at 5.25 per cent after cuts in 2025). They say the bank is being cautious because of rupee pressure, global uncertainty (like US policies), and the need to see how past rate cuts work.
Some analysts predict the rupee could weaken toward 91–94 over the coming months or year if pressures continue. But a recent trade deal with the US has helped stabilize sentiment somewhat.
The RBI may now buy more dollars when the rupee strengthens (to build reserves) rather than always selling to defend it.
The Bottom Line
The rupee is the “sacrificial lamb” because it is the easiest part to let go. Protecting growth and keeping interest rates supportive for businesses and jobs is more important right now. Heavy government borrowing and the impossible trinity leave no perfect solution.
India’s policymakers hope a slightly weaker rupee will help exports and growth in the long run, while they work on attracting more stable foreign money (like FDI) and controlling inflation. But for everyday people, a falling rupee means higher prices for many imported things.
The RBI will keep watching closely, stepping in to smooth big jumps, but it looks ready to accept gradual weakness to avoid bigger problems elsewhere. This is a careful trade-off in a complex world.
In conclusion, while sacrificing the rupee’s stability may preserve monetary autonomy and growth, it risks inflationary pains and eroded confidence. India’s policymakers must navigate this trilemma with finesse, leveraging depreciation’s upsides while cushioning vulnerabilities. As the economy matures, transitioning from defending arbitrary levels to fostering resilience could turn this ‘lamb’ into a strategic asset.
(The author is with Cholleti BlackRobe Chambers, Hyderabad)
