Rupee’s Rollercoaster Ride: RBI’s Dramatic Move Shakes Up India’s Financial Landscape

The Reserve Bank of India (RBI) has imposed the sharpest devaluation of the rupee in a quarter-century, sending shock waves through financial markets and representing a dramatic shift in economic policy. This move is less than two weeks after the PV Narasimha Rao administration took office and follows months of increasing pressure from a crippling balance of payments crisis.

 

Key Points:

 

Rupee Depreciated More than 20%:
RBI devalued rupee more than 20% in two rapid follow-up measures on July 1 and July 3, 2025. The dollar rose from ₹21.01 to ₹25.98, and the same devaluation was recorded against Japanese Yen and Pound Sterling.

 

Biggest Devaluation Since 1966:
This is the biggest rupee devaluation since the 36% devaluation of the Indira Gandhi regime in 1966.

 

Crisis Response:
It was necessitated by a severe macroeconomic and balance of payments crisis. India recently sold 20 tonnes of gold for $234 million of exchange and has seen reserves fall from $6.4 billion in January to $4.7 billion in June.

 

RBI's Rationale:
RBI Governor S. Venkitaramanan rationalized the action stating that it was undertaken to reduce current account and fiscal deficits, to remove inefficiencies and an underlying liquidity deficit. He ruled out further heavy devaluation in the immediate future.

 

Political Consensus:

Finance Minister Dr. Manmohan Singh signaled widespread political support for the drastic measure, with Left and Right party leaders agreeing that the economy had to be supported at once.

 

Impact on Trade and Inflation:
Devaluation will tend to raise the price of imports, which will tend to raise inflation, but might enhance the export competitiveness and help to curb the trade deficit. Historical Background: The last such devaluation was in 1991 when rupee had devalued 18-19% amidst a similar crisis. The current move is seen as the precursor to further economic reforms.

 

"As the market has digested the measure and as regards the budget it would be a good one since India is a net capital importer," said Dr. Singh, who was upbeat about the course of the economy towards recovery.

 

Source: Hindustan Times