THE rupee’s exchange rate has now crossed ninety-six to a dollar; and there is still no sign of its downward slide coming to a halt. There is talk of its crossing a hundred in the coming days; it is the worst performing currency in Asia at this moment and among the worst in the entire world. The Modi government has blamed the West Asian war for the rupee’s slide, but while there can be no doubt that the war has had a serious adverse effect on expectations about the exchange rate and hence on the actual exchange rate, the rupee’s slide had begun long before this war. At the end of 2024, the exchange rate was 85.47 rupees to a dollar; by February 27, just on the eve of the attack on Iran, it had already fallen to 91.08.

The slide, whether before or after the war is obviously attributable to an outflow of finance from India; while this outflow has been significant after the war in anticipation of India’s war-driven economic difficulties, it had started long before the war. Even a massive decline in foreign exchange reserves by as much as 5.2 percent between the start of the war and May 14 has not stopped the rupee’s precipitous fall.

There is an asymmetry at the centre of the RBI’s intervention which must be noted here. A country cannot afford to let its exchange rate appreciate when finance flows into it in abundant measure, for that would give rise to a “debt-induced deindustrialization” where its domestic producers would get outcompeted through cheaper imports and hence swell the ranks of the reserve army of labour, even as the country goes further into debt; the country in short would be borrowing from abroad to finance its own ruin in such a situation. To prevent such a denouement the RBI holds onto foreign exchange reserves to prevent an appreciation of the currency. It may be thought that the reserves so built up when finance flows in could be used to prevent a depreciation of the currency when finance flows out. But this is where the asymmetry comes in.

When finance flows out, the depletion of foreign exchange reserves to stabilize the currency gives rise to expectations of a further fall in currency value, since speculators know that less reserves are now available with the central bank; the depletion therefore does not come to a stop and gives rise to further depletion. Hence no matter how large the forex reserves with the central bank a depreciation of the currency is difficult to stop by running down reserves. Thus, while a currency appreciation can be easily prevented, a currency depreciation is far more difficult to prevent. This is especially so in the case of countries which have a more or less persistent trade and current account deficit, where in any case currency depreciations can always be expected to occur. There is in short only one direction in which the currency can move in such countries, and that is downwards.

Two further factors reinforce this process: one is the self-driving nature of a currency depreciation; any currency depreciation, by raising import costs, especially of major imported inputs like oil, gives a push to inflation, which in turn creates expectations of further currency depreciation. The second is the fact that for this reason, as well as others having to do with tax laws and safety considerations, there is a tendency on the part of the rich in the global South to take out their wealth from their own countries and park them abroad in “safe havens”. There is therefore an autonomous tendency for the currency to depreciate because of such behaviour.

Currencies in the global South therefore were for long pegged at fixed exchange rates vis-à-vis the dollar, with foreign exchange rationing occurring at those rates, as opposed to the endless cycle of currency depreciation-cum-inflation, involving a squeeze on the livings standards of the working people, in chasing the will-o-the-wisp of an “equilibrium” exchange rate. There is actually no such “equilibrium” because of the behaviour of domestic wealth-holders (to flee the country clandestinely) and of international speculators (expecting a depreciation of the currency from time to time). In India for instance between 1949 when the rupee was depreciated (along with the pound sterling) vis-à-vis the dollar, and 1966 when the next depreciation occurred, it was pegged at roughly five rupees to a dollar, which at least prevented inflationary pressures arising from this source.

The pursuit of neo-liberal policies changed all this. While the rupee was not made fully convertible, it was made to float, and global “investors” in particular were allowed to bring in and take out dollars whenever they wished. This did not matter in the beginning. Since the Indian financial market had been a sealed one for long for global financial “investors”, its opening brought in significant financial inflows, well in excess of the country’s balance of payments needs and the RBI built up a large cache of foreign exchange reserves reaching a peak of $728.5 billion in the week ending February 27, 2026. Even during this period however, because of the asymmetry we referred to above, while reserves were building up over time the rupee had also depreciated from 22.74 to a dollar in 1992-93 when it was first floated to 91.08 per dollar on the eve of the US-Israeli attack on Iran. Even over a period when finance was, on the whole, flowing in to the country the rupee was still depreciating.

The current fall in the rupee however appears to be altogether different from the earlier episodes. First, its fall has been sharper than before over a comparable period of time; and second, a spontaneously arrived-at temporary perch for the rupee, where it can settle down for a while before another round of speculative attacks carries it further downwards, seems unlikely, and this is so for two reasons: one, the war in Iran shows no signs of coming to an end, since the US does not wish to admit defeat and cannot on the other hand afford to escalate the war. And as long as the war lasts, the pressure on India’s balance of payments will continue, as would the downward slide of the rupee. And, two, the stagnation of world capitalism, which is the result of the neo-liberal order, has induced the US to impose unequal trade treaties on countries of the global South, including above all India, as a means of overcoming the crisis at home by “exporting” crisis to the people of the South. With such unequal trade treaties imposed upon it, India’s balance of payments, and hence its currency will face continued pressure. In short, the neo-liberal chickens are at last coming home to roost.

It has been common to blame the Modi government for the current fall of the rupee.  But while the Modi government has very little understanding of the economic situation, and its utterly immoral and indefensible proximity to the US-Israeli axis has robbed it of any room for manouevre (which even Pakistan has had), the roots of the crisis go back much earlier. In fact these roots go back to the very presumption that underlay neo-liberalism, namely, that a third world currency, and that too of a country that suffers from a chronic trade deficit, can have a floating currency whose price can be left to be determined by the “market”. This presumption amounts to saying that the lives of millions of working people should be left to the mercy of a bunch of currency speculators.

The government may appease speculators by offering some blandishments in the form of a higher interest rate (may be on some specific government bonds), or some tax concessions, as an earlier government had done in 2013 when there had been a similar speculative attack on the rupee; but it will have an immediate adverse effect on the working people by cutting them out from fiscal resources or subjecting them to the recessionary effects of an interest rate hike. What is more, even if perchance it halts the fall of the rupee for a while, that will only be a short and temporary halt; the slide will begin again and demand further sacrifices from the people, and so on. There is thus no alternative to pegging the value of the rupee and introducing direct controls over foreign exchange use (including capital controls on financial outflows) if the economy is to remain viable and people’s living standards are to be protected from speculators.