Exporters Missed the Bus, The Rupee Opportunity and What Comes Next
The accompanying graph shows the bus that most exporters have missed. When the rupee fell briefly below 92 at the end of January, the markets appeared to be in a free fall with no end in sight. Donald Trump’s tariffs were still loudly calling the tune and worse, foreign investors were deserting India like there was no tomorrow. Everybody was buying dollars, which exacerbated the pressure on the rupee, turning it into the worst performing currency in the world.
Of course, the bus moved on. The question now is when—or whether—the bus will return.
The Missed Opportunity
One of the classic tricks when waiting for a bus is to light a cigarette, but I stopped smoking a long time ago and fewer and fewer young people are smoking, which, at least, is a good thing. The analogy holds: exporters waiting for the rupee to fall further have been watching the bus depart without them.
Now, of course, the longer you wait the more money (premium) you are losing. Today, you are getting nearly ₹2 for December and 80 paise for June. Will the rupee fall by these increasingly large-looking numbers before then? The truth is nobody knows, but the other important truth is that any exports, certainly for June, were priced at a much more modest number. And one of the first rules in any market is that if the market suddenly gives you a gift, TAKE IT.
Of course, it would have been wiser to take it immediately, but in the heat of battle, decisions become difficult. This incidentally argues in favour of having your decision-making independent of the market temperature, as many have been recommending for decades.
The Market Has Changed
Today, the market temperature is decidedly lower. The Reserve Bank of India appears to be much more firmly in control, having certainly disciplined—if not vanquished—the rupee bears with a hefty slap into the non-deliverable forward arena. The recent announcement requiring banks to report NDF trades more definitively suggests the RBI remains focused on that particular job.
It seems clear that Governor Sanjay Malhotra recognises that part of his job is ensuring that the market doesn’t take the RBI for granted. Hopefully, the years of “the rupee will always fall by 2% (or 3% or even 6%) a year” are long gone. Allowing this kind of mentality to build up is a sure recipe for serious risk management failures and indeed for the currency ending up severely undervalued (as now) or overvalued.
The Inflation Story
Again, it is important to acknowledge that the primary reason for the build-up of such beliefs is the reality that inflation in India was consistently 4–5% higher than inflation in competing countries. More power to the central bank for getting this gap under control.
Today, inflation in India at 1.7% is lower than in the US, the European Union, and Japan. Only China and ASEAN are running lower inflation numbers. Thus, clearly, the “need” for the rupee to keep depreciating against the dollar from an inflation differential standpoint doesn’t hold water right now.
This is a fundamental shift. For years, the narrative was that India’s higher inflation necessitated a weakening rupee to maintain export competitiveness. That narrative no longer matches reality.
The Real Drivers of Competitiveness
From the point of view of export competitiveness, a weaker rupee is merely an inefficient and often not-so-quick fix, particularly with imports averaging 35% of exports in many sectors. Keeping inflation contained and, of course, doing the hard work of building infrastructure as well as investing in R&D and education are the more meaningful tickets.
A weaker currency makes exports cheaper, but it also makes imports more expensive. For sectors that rely on imported components, the benefit is partially offset. The real gains come from productivity, from innovation, from quality. These are not achieved by currency depreciation but by sustained investment in the fundamentals.
The diversification of export markets, which received a shock Trumpian boost, is another positive in this area. When one market becomes uncertain, having alternatives is invaluable.
The Real Story: Investment Flows
But trade is the thinner end of the currency wedge. It is foreign investment that really calls the shots. With the tide apparently turning in India’s favour—certainly judging from the big AI pomp and show currently shaking the media—we could well see direct investment flows pick up, which would, of course, easily seduce portfolio flows, and the rupee could see a jump upwards.
Indeed, if the RBI wanted to, they could use this as a platform to push the rupee even higher, closing or at least narrowing the real effective exchange rate gap. But, of course, talk is cheap—we need to see some action.
Foreign investment is attracted by growth prospects, by political stability, by the rule of law, by infrastructure. India has been making progress on all these fronts. The AI summit is a signal that the country wants to be seen as a serious player in the global technology ecosystem. If that signal translates into real investment, the currency will benefit.
What Exporters Should Do Now
Nonetheless, on balance, it does look like waiting for another bus would be a losing proposition. Exporters would be well advised to start selling forward, taking advantage of the nearly 2.5% per annum premiums prevailing. In fact, it may also be a good idea to once again extend the tenor of risk identification out to at least 12 months (and possibly more).
And while it is possible that premiums may improve further as US growth remains wobbly (markets are looking for at least two interest rate cuts in the US this year), the real story at the bus stop is USD-INR. Anything north of 90 looks like a gift. Enjoy it.
The Bigger Picture
The rupee’s journey is a reflection of India’s economic trajectory. The days of predictable, steady depreciation may be over. With inflation under control, with the RBI asserting its authority, with investment flows potentially picking up, the currency could surprise on the upside.
Exporters who have been waiting for the rupee to fall further may find that the bus they missed is not coming back. The opportunity that presented itself in January may have been a one-time gift. Those who took it have already benefited. Those who didn’t must now decide whether to chase the bus or wait for the next one.
The prudent choice, given the changed fundamentals, is to start selling forward and locking in the premiums that still exist. Waiting for another bus could indeed be a losing proposition.
Q&A: Unpacking the Rupee Opportunity
Q1: What was the “bus” that exporters missed?
When the rupee fell briefly below 92 at the end of January, it presented a significant opportunity for exporters to lock in favourable rates. Many exporters waited, hoping for further falls, and missed the chance to sell forward at those levels. The rupee has since stabilised, and the premium for future contracts has increased, but the peak opportunity has passed.
Q2: How has the RBI’s approach to the rupee changed?
Under Governor Sanjay Malhotra, the RBI has become more assertive in disciplining rupee bears, particularly through interventions in the non-deliverable forward market. The requirement for banks to report NDF trades more definitively signals continued focus on currency stability. The era of predictable “rupee will always fall by 2-6% a year” mentality appears to be ending.
Q3: Why does the inflation differential argument for a weaker rupee no longer hold?
India’s inflation at 1.7% is now lower than in the US, EU, and Japan. Only China and ASEAN have lower inflation. Historically, India’s 4-5% higher inflation justified rupee depreciation to maintain competitiveness. With inflation differentials narrowed or reversed, the fundamental case for a weakening rupee based on purchasing power parity no longer stands.
Q4: What are the real drivers of export competitiveness beyond currency?
A weaker rupee is an inefficient fix, especially since imports average 35% of exports in many sectors. True competitiveness comes from contained inflation, infrastructure investment, R&D, education, and market diversification. The “Trumpian boost” to diversifying export markets away from over-reliance on any single destination is a positive development.
Q5: What should exporters do now regarding currency risk?
Exporters should start selling forward, taking advantage of nearly 2.5% per annum premiums, and consider extending risk identification to at least 12 months. While further premium improvement is possible if US growth wobbles, waiting for another bus could be a losing proposition. With the rupee at anything north of 90, the current levels represent a gift worth taking.
