Many commentators see a fall in the rupee as a national embarrassment. Crossing a psychological level such as 100 to the dollar is seen almost as proof of economic failure. Economists usually approach the issue differently. They do not celebrate depreciation for its own sake, nor do they deny its costs. They ask a more disciplined question: What are the costs, what are the benefits, and is the movement orderly?
The costs are real. A weaker rupee raises the price of imports, especially crude oil, electronics, machinery and intermediate inputs. It also increases the burden on firms and financial institutions that have borrowed abroad. If depreciation is sharp and disorderly, it can create financial instability. These concerns cannot be dismissed.
But the benefits are also real. A gradual real depreciation makes Indian goods more competitive abroad. When the rupee weakens, Indian products become cheaper for foreign buyers, exports rise, firms expand and jobs are created. India may already be seeing early signs of this, with exports growing at double-digit rates recently.
The deeper benefit is not merely that firms sell more abroad. Exporting changes firms. Once firms enter global markets, they face demanding buyers, stricter quality standards, tougher competition and pressure to improve delivery, design and reliability. To survive, they must upgrade. They adopt better production methods, improve management practices, invest in quality control and learn from foreign customers and competitors.
This is not just theory. The literature on “learning by exporting” shows that firms that begin exporting often become more productive after entering export markets. Jan De Loecker’s study of Slovenian manufacturing finds that export entrants become more productive even after accounting for the fact that better firms are more likely to export.
These productivity gains do not remain confined to exporters. Suppliers upgrade to meet exporters’ requirements. Workers and managers move across firms. Competitors imitate successful practices. Techniques developed for global markets eventually enter domestic markets. This is the industrial-policy logic behind export promotion: Exports do not just generate foreign exchange, they generate capabilities.
South Korea’s experience makes the point sharply. Larry Westphal’s study argues that Korea’s export-led industrialisation was not simply about selling more goods abroad. It was about using export competition to force firms to acquire technological capability. Korea moved from simple manufacturing to steel, ships, electronics and automobiles because firms were pushed into global markets and forced to learn.
This is why exchange-rate policy should not be viewed only as a monetary or financial variable. It is also part of industrial strategy. A competitive rupee increases the number of Indian firms that can cross the threshold into export markets. Some will fail. Others will learn, scale and become more productive. The social gain from that process can exceed the private profit of the exporter.
A weaker rupee also supports domestic production. India wants greater domestic capability under Atmanirbhar Bharat. Tariffs can help producers, but they are blunt, distortionary and invite retaliation. Currency adjustment works more subtly. A weaker rupee makes imports costlier, but through a market mechanism rather than an explicit protectionist wall.
A depreciating rupee, therefore, should not automatically be read as a sign of economic collapse. The Japanese yen has weakened sharply. The Korean won has depreciated. Indonesia’s rupiah has faced pressure. Some European currencies have appreciated against the dollar. These movements reflect global capital flows, interest-rate differences, inflation expectations and investor preferences. They are not moral judgments on national performance.
The right conclusion is not that India should engineer a collapse of the rupee. That would be reckless. Nor should the Reserve Bank of India (RBI) ignore the foreign-exchange market. Its role is essential when markets become disorderly. Sudden volatility can damage bank and corporate balance sheets, trigger panic, disrupt trade finance and threaten financial stability. Foreign-exchange reserves exist precisely to prevent such breakdowns.
But there is a difference between preventing disorderly volatility and defending arbitrary psychological levels. The RBI should use reserves to smooth excessive volatility, not to freeze the rupee at a round number. India should also avoid measures that create future risks merely to delay gradual depreciation today. Guarantees, artificial incentives and interventions that encourage short-term inflows can become tomorrow’s outflows. Powerful policy weapons should not be wasted defending symbols.
The rupee is a price, not a national flag. A stable economy does not require a permanently stable exchange rate. If gradual, orderly depreciation helps Indian firms enter global markets, learn, upgrade and create jobs, it should not be feared. It should be managed carefully and used intelligently.
The writer teaches at Indian School of Business
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