The Indian rupee has regained some of the ground it lost against the US dollar in recent months. It traded at 94.63 to a dollar at the close of day on Monday. This is a recovery from the 96.83 level that it touched on 20 May. The interim peace deal between the US and Iran, subsequent decline in international energy prices and policy measures to attract more dollars to the Indian economy have all helped the rupee’s external value recover.
Much the same happened in 2013. It was almost the same story as what we have seen this year. India’s balance of payments deteriorated, though under different circumstances.
India then had a wide current account deficit, while the trade gap is far more modest today. The problem was not an overheated economy, but a drying up of international capital flows into the economy. The rupee had slipped to 68.81 against the dollar on 28 August 2013. It was back at 61.52 a month later.
Then, as now, the Reserve Bank of India (RBI) offered an attractive subsidy for dollar deposits by overseas Indians.
For more than two decades, the Indian central bank has said that it does not target a specific value of the rupee. It is only concerned about excess volatility. In practice, there are important nuances in what this formal intention means.
In November 2025, the International Monetary Fund (IMF) classified the de facto Indian exchange rate regime as a “crawl-like arrangement,” which means the exchange rate stays within a 2% band around a trend for at least six months. The multilateral lender had earlier classified the Indian exchange rate regime as a “stabilised arrangement.”
What is the difference between the two classifications? A stabilized arrangement functions within a 2% band around a level, or a quasi-fixed exchange rate. A crawl-like arrangement is within the same 2% band but it is around a trend. In other words, it allows a drift of the rupee in one direction. The upshot: Indian exchange rate policy has become more flexible compared to the rigidity during the economic recovery after the pandemic ended.
It is also important to remember the context. India moved from a comfortable balance-of-payments surplus to a worrisome deficit over this period, and hence a currency that was likely to move up against the US dollar on the back of strong capital inflows to one that came under selling pressure as net capital inflows weakened.
This aligns with the view that RBI has traditionally intervened in the foreign-exchange market aggressively to prevent rupee appreciation but has generally allowed the Indian currency to lose value when the fundamentals justify a depreciation.
Too many people consider the exchange rate as a measure of national strength rather than a price that is supposed to modulate economic relations with the rest of the world. This is true not only of India.
A recent paper by IMF economist Kodjovi M. Eklou that studied the period from 2000 to 2019 shows that “given that the exchange rate is often seen as a barometer of government performance, there could be strong incentives to influence exchange rate valuation during elections.”
This study found that in a sample of 28 emerging markets and advanced economies, central banks tend to lean against currency depreciation before an election.
This is especially true of emerging markets. Their central banks tend to sell more dollars before an election compared to dollar sales in periods that are not close to polls. Of course, much also depends on the political popularity of the government, or how competitive elections are. India is one of the countries in the study’s sample.
While the IMF working paper suggests that the politics of exchange-rate management is prevalent in emerging markets rather than in advanced economies with strong institutional backing for central bank independence, University of Texas economist Carola Binder showed in a 2021 paper that even central banks with high levels of legal independence frequently face pressure from their respective governments.
The variable of interest for Binder was not dollar sales to prevent depreciations, but interest-rate policy to stimulate economic activity. Governments always want looser monetary policy, though curiously she notes that such pressure is greater when there is less political competition. Binder worked with data from 118 central banks that covered the period from 2000 to 2018.
The core argument in favour of independent central banks is to insulate them from political pressure, since financial policy has to be stable and predictable for economic agents to take decisions over the long term, while political leaders work with shorter time frames linked to electoral cycles. That led to calls for central banks bound by policy rules in order to minimize “time inconsistency.”
However, there has been a revival of concerns about unelected technocrats operating independently of elected governments chosen by citizens.
The exchange rate is often described as the single most important price in an open economy. Like it or not, history tells us that exchange-rate policy is not only about economics. It is also informed by a dash of political economy. It is eventually a negotiation between numbers and narratives.
The author is executive director at Artha India Research Advisors.