| In a matter of weeks, the rupee has gone from being one of Asia’s best-performing currencies to one of the region’s biggest losers. This week it fell below 86 to the dollar, a new low. There’s no reason for alarm yet, say currency experts. So far, the rupee seems to be catching up with its long-term trend of 2.5% to 3.5% average annual depreciation. The Indian currency lost around 2.8% against the dollar in 2024 and is down over 1% so far this year. The rupee’s fall is in line with the US dollar strength seen in the three months since Donald Trump’s reelection, said Manish Wadhawan, head of global treasury at Tata Consultancy Services, pointing to a 9% rise in the dollar index in the same period. Trump’s tariff proposals, intended to narrow the US trade deficit, along with a strong economy and an anticipated Fed pause on rate cuts have pushed the dollar higher (tempered this week by softer inflation). In response, then Reserve Bank of India Governor Shaktikanta Das further stepped up defense of the rupee, blowing through more than $60 billion of ample foreign exchange reserves late last year. It’s prompted calls for a looser grip on the currency. “The magnitude of FX intervention since October has been substantial and is resulting in adverse effects, such as tighter banking liquidity and higher short-term rates at a time of weakening growth,” Sonal Varma, chief economist India and Asia ex-Japan at Nomura, told Bloomberg. The RBI must allow “some baseline volatility because it maintains a certain level of private hedging, which is important because the central bank can’t do full absorption of risk,” former RBI Deputy Governor Viral Acharya said to Bloomberg. Now Sanjay Malhotra, the new RBI Governor, seems to be doing just that. The question is how long will he have the stomach to pursue a market-determined rate? Earlier this week, Goldman Sachs upgraded its dollar forecast for the second time in as many months, estimating a 5% rally over the coming year. The dollar’s dominance shows no signs of abating, setting the stage for a challenging year ahead for Asian currencies, according to Mary Nicola, Markets Live Strategist at Bloomberg. To be clear, India’s stronger real-effective exchange rate makes room for some further depreciation — that will also help the price competitiveness of Indian exports given China’s move to allow a weaker yuan and impending higher US tariffs. The natural way to combat higher tariffs is through currency depreciation, former RBI Governor Raghuram Rajan said in an interview to Mojo. The challenge lies in how low and fast the rupee could fall. It would be no surprise if the rupee crashes through the 90 barrier in 2025, analysts at Gavekal research wrote in a Jan. 10 report. “A bigger depreciation of around 10%, taking the rupee to 95, is not out of the question.” TCS’s Wadhawan, who manages currency risk at India’s largest IT services exporter, is more sanguine at this point. Any move which is in line with long-term trends would be fine and may not be alarming as long as the move is in sync with other currencies on a relative basis, he said. Businesses should aim “to hedge currency exposures on a regular basis and not be experimental,” he added. But many Indian investors and companies have little experience of hedging their forex needs and a stampede to hedge such risk could propel the rupee to overshoot to the downside, leading to a sharper-than-expected adjustment, Gavekal analysts wrote. A rapidly depreciating currency, more so at a time of rising oil prices, will drive up inflation, putting paid to expectations of an interest rate cut in the February monetary policy committee meeting. That leaves just fiscal policy to deal with slowing growth, estimated to decline sharply to 6.4% this fiscal year (2024-25) versus 8.2% in the last. But were the government to significantly deviate from budget discipline it could add to the pressure on the currency. Also, sharp sways in the currency market may make foreign investors more wary especially when hedging the rupee for dollar-based investors costs roughly 3% per annum, writes Bloomberg’s Nicola, underscoring the policy dilemmas facing India. Before he became prime minister, Narendra Modi made rupee strength a matter of national pride to berate his opposition at times of currency depreciation. Now the penny may drop on him. Or should I say paisa? | 
