The Indian rupee slipping past the psychologically important 91 level against the US dollar has triggered fresh debate on currency stability, capital flows, and the Reserve Bank of India’s tolerance for depreciation. However, according to Neelkanth Mishra, Chief Economist at Axis Bank and Head of Global Research at Axis Capital, the move does not reflect underlying macroeconomic stress. Instead, it underscores the inherently volatile nature of currency markets and the absence of a natural anchor that exists in equities or bonds.

Speaking in an interview with Moneycontrol, Mishra said the rupee’s recent weakness should be seen in context, especially as the currency closed at a record low of 91.03 per dollar on December 15. From a fundamentals perspective, he believes India remains on solid footing, with no immediate red flags in the current account, balance of payments, or export competitiveness indicators.

The rupee’s depreciation comes at a time of heightened global uncertainty, rising cost of capital internationally, and tight liquidity conditions for emerging markets. Currency markets, unlike equity markets, do not have valuation-based anchors. As a result, speculative positioning and shifts in global risk sentiment can exaggerate short-term moves.

Mishra pointed out that India’s current account deficit remains manageable. Services exports continue to grow faster than nominal GDP, offering a steady inflow of foreign exchange. While elevated gold and silver prices have pushed up imports, lower crude oil prices have helped offset this pressure. Taken together, these factors suggest that external balances are not under strain.

A key metric reinforcing this view is the real effective exchange rate (REER). According to Mishra, India’s REER is currently at a 10-year low, indicating that the rupee is already competitively priced. This weakens the argument that further depreciation is required to support exports.

What is changing

Despite comfortable fundamentals, the rupee has come under pressure due to a combination of short-term and technical factors. Mishra attributed part of the move to speculative positioning in currency markets and the unwinding of the RBI’s forward dollar positions, which markets have been closely tracking.

Additionally, robust equity markets have enabled exits by private equity funds, venture capital investors, and multinational corporations. While these capital outflows are not structural in nature, they can temporarily weigh on the currency. Global volatility and tighter financial conditions have further amplified these moves.

Mishra expects the rupee to trade in a relatively narrow band of 91–92 per dollar in the near term, extending until the end of FY26. For FY27, Axis Bank’s internal projections assume a broader range of 92–94, reflecting expectations of continued global currency adjustments.

Why it matters

The rupee’s trajectory has direct implications for inflation management, import costs, capital flows, and monetary policy credibility. A sharp or disorderly depreciation could force the RBI to respond more aggressively, even if macro fundamentals remain intact.

Mishra stressed that the RBI does not defend any specific exchange rate level. However, it has a clear mandate to contain excessive volatility. If quarterly depreciation moves beyond what the central bank considers tolerable, intervention is likely. This typically takes the form of spot or forward market operations aimed at smoothing volatility rather than reversing the trend.

In his view, the recent move does not yet qualify as a crisis but does warrant monitoring, particularly if speculative pressures intensify.

Official views and policy signals

Mishra’s comments align with the RBI’s long-standing stance on exchange rate management. The central bank has consistently maintained that it targets stability, not levels. Intervention is guided by volatility rather than directional bias.

He also noted that India is entering a phase of global competitive currency debasement over the next three to five years, as major economies grapple with growth slowdowns and fiscal pressures. In such an environment, a mildly weaker currency is not necessarily detrimental, provided inflation expectations remain anchored.

On the monetary policy front, Mishra does not expect further rate cuts. With growth running above trend and the RBI having shifted to a neutral stance, he believes holding rates steady is the prudent course.

Market and business implications

For Indian markets, a stable rupee in the 91–92 range reduces the risk of imported inflation shocks while preserving export competitiveness. IT services exporters and other dollar-linked sectors benefit from a weaker currency, but excessive volatility could disrupt hedging strategies and investor sentiment.

From a bond market perspective, Mishra flagged concerns over India’s steep yield curve, attributing part of it to reduced T-bill issuance. While this does not directly affect the currency, it influences capital flows and broader financial conditions.

Bull vs Bear scenarios

In a bullish scenario, global volatility eases, capital flows stabilise, and the RBI’s presence in the market anchors expectations. The rupee remains range-bound, allowing policymakers to focus on growth and fiscal consolidation.

In a bearish scenario, sustained global risk-off conditions, sharp capital outflows, or commodity price shocks could push the rupee beyond the RBI’s comfort zone, prompting more frequent intervention and potentially tightening domestic liquidity.

Key risks to watch

The primary risk lies in external shocks rather than domestic fundamentals. Sudden spikes in global interest rates, geopolitical disruptions affecting energy prices, or abrupt shifts in foreign portfolio flows could test the RBI’s tolerance for volatility. Additionally, persistent speculative positioning against the rupee could force the central bank to act sooner than anticipated.

For now, the message from Axis Bank’s chief economist is clear: the rupee’s weakness reflects volatility, not vulnerability—but the RBI is unlikely to stay on the sidelines if swings become excessive.