Whalesbook
Rupee Breaches Rs 90/USD Mark; RBI Focuses on Inflation
The Indian rupee crossed the Rs 90 per US dollar threshold for the first time in early December 2025, capping a year of steady decline. Foreign investor pullbacks from Indian equities and reduced export competitiveness due to US tariffs contributed to the currency's slide. However, top economic officials signaled a calm approach.
Reserve Bank of India (RBI) Governor Sanjay Malhotra stated clearly on December 5, 2025, that the central bank does not target specific price levels or bands for the rupee, allowing market forces to dictate its value. Chief Economic Adviser V. Anantha Nageswaran echoed this sentiment, asserting the government was not concerned about the depreciation, which he predicted would improve in 2026 and would not negatively impact inflation or exports.
The Impossible Trilemma Framework
These statements reflect a core economic principle known as the impossible trilemma. First articulated by economists Robert Mundell and Marcus Fleming, this concept posits that a country cannot simultaneously maintain free capital flows, an independent monetary policy, and a fixed exchange rate. Countries must choose two out of these three objectives.
India has strategically opted for monetary policy independence and capital account openness since its economic liberalization in the 1990s. This means allowing capital to move freely across borders and enabling the RBI to set interest rates based on domestic conditions like inflation and growth. The trade-off is accepting exchange rate flexibility, meaning the rupee's value is allowed to fluctuate.
Managed Float and RBI Interventions
While India officially operates a market-determined exchange rate system, it functions as a "managed float" regime. The RBI intervenes in foreign exchange markets not to defend a specific rupee level, but to curb excessive volatility. These interventions can include spot market operations, selling dollars when the rupee weakens sharply, and forward market operations or swap operations to manage liquidity and premiums.
As of January 2, 2025, India held approximately $686.8 billion in foreign exchange reserves, providing the necessary ammunition for these interventions. However, aggressive defense of the rupee would rapidly deplete these reserves, leaving the nation vulnerable. Furthermore, PwC India's Ranen Banerjee noted that the RBI's net forward positions can also influence interventions. The central bank's priority remains its statutory objective of flexible inflation targeting, aiming for CPI inflation at 4% with a 2% tolerance band.
Strategic Rationale for Flexibility
Allowing the rupee to depreciate, rather than defending arbitrary levels, serves multiple purposes. It helps preserve valuable foreign exchange reserves for genuine crises, enhances export competitiveness by making Indian goods cheaper in dollar terms, and critically, maintains the RBI's autonomy to set interest rates according to domestic economic needs. A flexible exchange rate also makes speculative bets riskier, deterring one-sided currency movements. The rupee's depreciation is seen not as a failure, but as a deliberate policy choice within the constraints of the impossible trilemma.