The Rupee’s Twelve-Year Slide: Inflation, Expectations and the Case for a Lower Inflation Target.....

Introduction

The Indian rupee’s depreciation over the past twelve years reflects more than movements in the US dollar or temporary foreign-capital outflows. It also raises a deeper question about India’s inflation performance, the purchasing power of its currency and the expectations formed by households, businesses and investors. The rupee traded around ₹60–61 per US dollar in 2014 and reached approximately ₹90–95 in 2026, representing a depreciation of roughly 50–58% in its dollar exchange rate. During the same period, India’s consumer prices rose substantially, reducing the domestic purchasing power of money. Inflation alone cannot explain the entire exchange-rate movement, because the dollar strengthened globally at various times, US interest rates changed, and capital flows responded to geopolitical risks and India’s external financing needs. Nevertheless, persistently higher domestic inflation than that of major trading partners can gradually weaken a currency’s purchasing power and competitiveness. The central question is whether India’s monetary framework has sufficiently anchored long-term inflation expectations and whether a lower inflation target could strengthen confidence in the rupee without sacrificing employment, investment and economic growth.

 

The Previous Regime: High Inflation and the Cost of Delayed Adjustment

Before the adoption of formal flexible inflation targeting, India experienced prolonged periods of relatively high consumer inflation, particularly during the late 2000s and early 2010s. CPI inflation frequently reached double digits in 2009–2013, while elevated food prices, rising wages, fiscal pressures and supply bottlenecks reinforced inflationary expectations. The rupee weakened from approximately ₹45 per dollar in 2008 to around ₹60–68 during the 2013 currency-market turmoil. The depreciation was also influenced by the US Federal Reserve’s announcement of tapering, a large current-account deficit and foreign-investor concerns. This experience demonstrated that inflation and currency depreciation can reinforce one another: domestic price increases reduce competitiveness, depreciation makes imported fuel and other inputs more expensive, and higher import costs feed back into prices. The Urjit Patel Committee’s recommendations subsequently helped establish a formal inflation-targeting framework, with the Reserve Bank of India adopting a 4% CPI inflation target and a tolerance band of 2–6% in 2016. The previous regime therefore offers an important lesson: tolerating persistent inflation can impose substantial costs, but exchange-rate movements cannot be attributed to inflation alone.

 

Twelve Years of Inflation Targeting and Rupee Depreciation

The period since 2014 has brought improvements in the monetary-policy framework, greater transparency and a more explicit commitment to price stability, but it has not eliminated rupee depreciation. The exchange rate moved from roughly ₹60–61 per dollar in 2014 to around ₹83 in 2023 and approximately ₹86–88 in 2025, before facing further pressure in 2026. The rupee’s decline has occurred alongside several international shocks, including the pandemic, Russia’s invasion of Ukraine, volatile crude-oil prices, tighter US monetary policy and changes in global risk appetite. India’s dependence on imported crude oil—roughly 85–90% of domestic oil consumption in recent years—makes its external balance particularly sensitive to energy prices. Meanwhile, the RBI’s inflation framework has generally helped bring inflation down from the exceptionally high levels of the early 2010s, although the 2020–2023 period included repeated breaches of the upper tolerance limit. India’s CPI inflation averaged approximately 6–7% in several earlier years of the period, fell substantially in 2024–2025, and remained vulnerable to food and energy shocks. The distinction is important: India has not experienced twelve uninterrupted years of uncontrolled inflation, but recurring price shocks, inflation differentials and external vulnerabilities have continued to put pressure on the currency. The policy challenge is to prevent temporary shocks from becoming permanent expectations of higher prices.

 

How Inflation Expectations Can Weaken the Rupee

Inflation expectations influence currency markets through several connected channels. When households expect prices to rise persistently, they may bring forward purchases; businesses may increase prices and wages pre-emptively; and investors may demand higher returns to compensate for the expected erosion of purchasing power. If domestic inflation remains above that of trading partners, Indian goods become relatively more expensive unless productivity improves or the nominal exchange rate adjusts. Over time, this can weaken export competitiveness, increase import demand and contribute to currency depreciation. Investors also compare expected real returns rather than nominal interest rates alone. If they believe Indian inflation will remain elevated, a relatively high domestic interest rate may not be sufficient to attract or retain foreign capital. Depreciation then increases the rupee cost of imported oil, machinery, electronics and industrial inputs, adding to inflation and potentially creating a self-reinforcing cycle. However, expectations must be distinguished from observed inflation: a temporary rise in vegetable prices does not necessarily imply entrenched inflation, and a weaker rupee can also reflect a stronger dollar rather than deteriorating domestic fundamentals. The RBI’s task is therefore not simply to raise interest rates whenever inflation increases, but to convince markets that persistent inflation will not be accommodated while addressing the supply constraints that make price shocks recur.

 

Comparing the Two Regimes: What Has Changed?

The pre-2014 period was characterised by less firmly anchored inflation expectations, episodes of double-digit inflation and the absence of a formal numerical inflation target. Since 2016, the RBI has operated under a clearer framework centred on 4% CPI inflation, with a permitted range of 2–6%. This institutional change has improved accountability and given monetary policy a more explicit nominal anchor. Yet the exchange rate’s movement from approximately ₹60 per dollar in 2014 to around ₹90–95 in 2026 shows that formal targeting cannot guarantee currency stability. Nor does the comparison establish that the current regime has produced worse inflation outcomes: the earlier period included exceptionally high inflation, while the later period faced extraordinary global shocks and changes in the relative strength of the dollar. The meaningful comparison is therefore between the credibility of policy commitments, the persistence of inflation and the ability of the economy to absorb supply shocks. A credible inflation target can help stabilise expectations even when the exchange rate depreciates; conversely, repeatedly allowing inflation to settle near the top of the tolerance band may weaken confidence in the commitment to price stability. The objective should be to improve the quality of disinflation, not to treat every episode of currency weakness as proof that the inflation-targeting framework has failed.

 

Could Lowering the Inflation Target Strengthen the Rupee?

Lowering India’s 4% inflation target—for example, to 3% over a suitable transition period—could strengthen the rupee’s long-term foundations if it credibly reduced expected inflation and the risk premium demanded by investors. A lower target could encourage households and businesses to make financial decisions on the assumption of more stable prices, protect the purchasing power of savings and reduce the tendency for depreciation to be incorporated into future price-setting. It could also improve competitiveness if India’s inflation rate gradually converged towards that of its major trading partners. But lowering the target on paper would not automatically lower actual inflation or appreciate the rupee. If food, fuel, transport, housing and imported-input costs continue to rise because of supply shortages, a stricter target could force the RBI to maintain higher interest rates for longer, weakening credit growth, investment and employment without resolving the underlying causes of inflation. A credible transition would require evidence that inflation can sustainably remain near 3%, improved food-storage and logistics infrastructure, more reliable energy supplies, stronger competition, productivity growth and prudent fiscal policy. The RBI should also explain how it would respond to temporary supply shocks rather than tightening indiscriminately. A lower target is therefore a possible long-term reform, not a substitute for addressing the structural sources of inflation.

 

The Role of Interest-Rate and Exchange-Rate Expectations

The rupee’s stability depends not only on the current repo rate but also on what investors believe will happen to inflation, interest rates and the exchange rate over the next several years. Higher interest rates can support the currency by improving the relative return on rupee assets, but the effect is conditional on the expected inflation differential, global yields, risk appetite and confidence in future growth. If investors expect inflation and depreciation to continue, higher nominal rates may provide little improvement in expected real returns. Conversely, a credible commitment to low and stable inflation can reduce the compensation investors demand for holding rupee assets, even without repeated rate increases. The RBI can support orderly currency-market conditions through foreign-exchange intervention, adequate liquidity management and communication that distinguishes temporary shocks from persistent inflation. Such intervention cannot permanently defend an exchange rate inconsistent with economic fundamentals, and excessive tightening to protect the rupee can damage domestic demand and investment. The most durable strategy is to coordinate credible monetary policy with measures that raise productivity, reduce import vulnerabilities and expand export capacity. A stable currency is ultimately supported by confidence that India can produce competitively, attract sustainable capital and preserve the purchasing power of money.

 

Conclusion: Make Low Inflation a Foundation of Competitiveness

India’s rupee depreciation since 2014 reflects a combination of inflation differentials, oil-import dependence, changing global interest rates, capital flows and the dollar’s international strength. The rise from approximately ₹60 per dollar to around ₹90–95 represents a substantial loss in the rupee’s external value, but it does not prove that inflation alone caused the decline or that the post-2016 monetary framework has failed. The earlier regime demonstrated the dangers of persistently high inflation; the present regime has established a clearer target but must continue strengthening the credibility and durability of price stability. Lowering the inflation target from 4% to 3% could eventually help anchor expectations and improve competitiveness, provided the economy can achieve it without excessive damage to employment, investment and supply expansion. The priority should be to bring inflation sustainably towards the lower part of the existing tolerance band, prevent temporary shocks from becoming embedded in expectations, and improve food, energy and industrial supply. India cannot promise a permanently strong rupee, but it can build a more resilient one by ensuring that domestic inflation does not systematically erode competitiveness and that monetary policy remains credible over the long term.