If Inflation Rate Settles At 3-4%, It Might Lead To Slower Rupee Depreciation: CEA Nageswaran

At the IVCA Conclave 2025, Chief Economic Advisor Nageswaran addressed issues surrounding the rupee-dollar exchange rate, emphasising the potential for slower rupee depreciation, if inflation rates stabilised.

The domestic currency plummeted to a record low against the US dollar on Monday as it opened 53 paise to trade at 87.96 a dollar, slightly shy of the psychologically crucial level of 88. The currency strengthened at market close on Monday, and opened stronger on Tuesday, gaining 13 paise.

But this strengthening was largely led by heavy intervention by the central bank to curb volatility, as they sold the greenback in large numbers.

The Reserve Bank of India sold $7 billion on Monday as rupee moved up to 87.41 and closed lower at 87.47. "The rupee was to open 87.57 on Tuesday, but RBI ensured it opens at 87.38 and then sold dollars amounting to $4 billion to bring it to 86.60, with stray deals at 86.50," said Anil Kumar Bhansali, head of treasury and executive director, Finrex Treasury Advisors LLP.

“In the last 30 years, the rupee’s annual depreciation was about 3%, and that is because India’s inflation rate differential to the US was about 3%. So in the long run...which is five years or beyond, it boils down to the inflation differential. As long as our inflation rate is 1% or 2% above the average inflation rate of developed countries, the currency will depreciate,” Nageswaran said

He further explained, “But this currency depreciation has not prevented India from giving returns to investors, and therefore rupee depreciation is something that one can factor into investment decisions."

So, going forward, will the rupee continue to depreciate? It’s uncertain based on the last 30 years, said Nageswaran.

"If inflation rates remain sticky and we settle around a 3-4% inflation rate instead of 5-6%, and if developed countries also struggle to bring their rates below 3-4%, then naturally the gap between the two shrinks a lot, and therefore we might see a much slower rupee depreciation," he added.

Nageswaran also urged not to be overly concerned about the current situation, describing it as an extraordinary period of dollar strength that has lasted over the last 13-14 years. He concluded, “Nothing is exempt from the law of gravity.”