The Reserve Bank of India (RBI) will deny it, but its effective rupee management underwent a sea change after the global financial crisis. Gone was the prior aggressive intervention in the currency market to check the pressure on the rupee to appreciate because of destabilising capital inflows. The new mantra was a hands-off policy. This had its merits given the constraint: tight monetary policy, to check inflation.

But along the way Indian policy makers forgot whether or not the rupee was misaligned. Capital inflows were financing the wider current account deficit and hence it was thought that the rupee was appropriately aligned. But the need to offset the high inflation differential of India with its trading partners was ignored. Thus, the rupee became overvalued and needed significant depreciation beginning 2011 to correct its misalignment. Read More

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