MUMBAI: The Reserve Bank of India (RBI) must take proactive steps to curb the rupee’s slide by selling dollars from its substantial foreign exchange (Forex) reserves, according to Capitalmind CEO Deepak Shenoy
He asserts that the central bank’s current approach is inadequate to stabilise the currency and suggests measures to allow market dynamics to play a larger role in determining the rupee’s value.
Speaking to ThePrint, Shenoy emphasised that India’s forex reserves, which stood at $634.585 billion in January 2025, are more than sufficient to meet the country’s needs for several years. He criticised the RBI for accumulating reserves instead of deploying them effectively during periods of significant foreign fund outflows.
Case for a robust dollar market
Shenoy argued that the RBI’s dominance in controlling dollar reserves limits market efficiency. He proposed a more open system that allows banks and other institutions to hold and transact in dollars, creating a robust and competitive forex market.
“If there was meaningful capital account convertibility, banks could own significantly higher amounts of dollars, and the market could meet demand without excessive central bank intervention,” he said.
Inflation dynamics and rupee depreciation
The fund manager also highlighted the inflation differential between India and its trading partners, particularly the US, as a key factor influencing currency movements. India’s inflation, at around 4.5-5 per cent, is higher than the US rate of 2.5-3 per cent. This difference, he noted, typically results in the rupee depreciating by 2.5 per cent annually.
However, the rupee’s recent 2.5 per cent decline in a single month deviates from this trend. Shenoy attributed this to the RBI’s intervention in the forex market, which, he claimed, has forced the rupee to depreciate under the pretext of reserve-building.
“Let the rupee appreciate”
Shenoy advocated for a hands-off approach by the RBI, allowing the rupee to find its equilibrium. He estimated that in a free-market scenario, the rupee could appreciate by 15-20 per cent over the next two years, buoyed by India’s rapid economic growth and its attractiveness to global investors.
“When dollars flow in, the RBI should not intervene to keep the rupee undervalued. Allowing the rupee to appreciate to levels like Rs60-65 when inflows are strong would balance market dynamics,” he said.
Shenoy also recommended increasing the limits on domestic mutual funds investing abroad. Currently capped at $8 billion, he suggested raising it to $100 billion to diversify holdings and reduce the RBI’s dollar reserves burden. “In times of crisis, that money can be repatriated, but until then, let the people hold it,” he added.
Need for policy shift
India’s forex reserves, which peaked at $704.885 billion in September 2024, are far beyond the country’s requirements, Shenoy argued. “Even with five to six years of current account deficits, we’d need only $250-$300 billion. The reserves we have now are excessive and underutilised,” he said.
Shenoy’s comments underline the need for a strategic shift in RBI’s forex policy, moving from reserve accumulation to a more dynamic approach that stabilises the rupee while fostering market efficiency.
(This article is based on an interview with ThePrint and includes their reported insights.)
