RBI's clarity of communication will be as critical as the policy itself

Business Standard March 17, 2026

The Reserve Bank of India will announce its next monetary policy on April 9. While every meeting of the Monetary Policy Committee (MPC) draws close scrutiny, this one comes at a particularly critical juncture because of the conflict in West Asia. Even if the MPC leaves the policy rate unchanged, its communication will be crucial in calming financial markets amid heightened uncertainty. Markets will look for clear guidance on how the MPC interprets the uncertainty and what it implies for the future course of monetary policy.

In inflation-targeting economies such as India, communication is a key instrument of monetary policy. Financial markets analyse MPC statements and the governor’s remarks for signals about the future path of interest rates. When central bank communication becomes complex or ambiguous, market volatility tends to rise (Sengupta and Mathur, 2019). This matters even more in periods of uncertainty, when investors and firms struggle to form clear expectations about the economic outlook.

Two main sources of uncertainty will shape the backdrop to the MPC’s decision in the coming weeks.

The first is the war in West Asia. Until recently, India’s macroeconomic conditions appeared stable, with strong growth and moderate inflation. That stability has quickly eroded.

The conflict has disrupted supplies of key commodities such as crude oil, natural gas, and fertilisers. India imports nearly 90 per cent of its crude oil, about half of its natural gas, and roughly a quarter to a third of its fertiliser needs, much of it from West Asia. Prolonged disruptions could push up domestic energy and fertiliser prices and eventually feed into food prices and headline inflation.

Inflation had already begun to edge up even before these shocks. The consumer price index-based inflation rose to 3.2 per cent in February, a nine-month high. Although still below the RBI’s 4 per cent target, the margin for comfort has narrowed compared with June 2025 to January 2026, when inflation averaged about 1.5 per cent.

At the same time, disruptions to global trade routes could hurt exports and production, given that West Asia accounts for roughly 15 per cent of India’s exports. Higher energy costs may further weaken output and growth. Supply shortages often force adjustments that compress demand. The government has asked domestic gas producers to divert supplies towards households, reducing availability for industries such as plastics, chemicals, fertilisers and aluminium. Restaurants and other service sectors that rely on gas may face higher costs and weaker sales. Rising jet fuel prices are also pushing up airfares, which could dampen travel and tourism demand.

This creates a policy dilemma for the MPC. Should it prioritise containing inflation and adopt a more hawkish stance, or support growth as uncertainty rises? The committee will also need to clarify whether the recent increase in inflationary pressures is likely to be temporary or could it generate second-round effects that require a policy response. Markets will look for clarity on how the MPC balances these risks, without which, uncertainty about the policy outlook will persist.

It is also worth noting that even though the RBI reduced the repo rate by a cumulative 125 basis points in 2025 to support growth, long-term bond yields have not fallen. The yield on the 10-year government security has risen to around 6.75-6.80 per cent, close to levels seen before the rate-cutting cycle began. Normally, bond yields decline when policy rates fall. This divergence reflects rising uncertainty in financial markets. A clear articulation of the MPC’s assessment of macroeconomic risks could help stabilise expectations and prevent further increases in yields during this volatile period.

The second source of uncertainty is the new CPI index introduced in February. The revision changes both the weightings assigned to items and the composition of the consumption basket, which has expanded from 299 to 358 items. The weight of food has fallen sharply from about 46 per cent to around 37 per cent. Within food, the share of volatile items such as cereals has declined, while relatively stable components such as protein-rich foods have gained importance. A lower food weight may make headline inflation less sensitive to temporary supply shocks, such as monsoon variability. If inflation becomes less volatile, monetary policy could also become more predictable.

But the implications are not automatic. Markets will want to understand how the MPC interprets the new index. Does the change in weightings alter its assessment of inflation dynamics? Will food shocks play a smaller role in policy decisions? Could the behaviour of core (non-food, non-fuel) inflation change? Clear communication on these questions will help stabilise expectations as the new CPI becomes the basis for monetary policy.

As the MPC prepares its April 9 statement, clarity of communication will matter as much as the policy decision itself. Minimising surprises and setting clear expectations will help ensure monetary policy remains effective in the volatile months ahead.

India-EU trade pact moves from promise to reality but challenges persist

Business Standard February 17, 2026

The announcement of a free trade agreement (FTA) between India and the European Union is a major turning point—not so much for its immediate gains, but for what it signals about India’s economic strategy. After several years of high tariffs and inward-looking policies, the deal reflects a clear recognition by the Indian government that exports must play a bigger role in driving growth. However, an FTA is only a framework. It creates opportunities, but it is not a cure-all. To fully benefit from this deal, India will still need significant domestic reforms.

The deal reflects the government’s confidence that Indian firms are capable of competing more strongly in global markets. Where does this confidence come from? In part, from the sheer room India has to expand its global presence. Despite being the world’s fourth-largest economy, India accounts for less than 2 per cent of global goods exports. Even a two-percentage-point rise in market share would effectively double exports.

Confidence also stems from global shifts. Supply chains are diversifying away from China, and European firms are seeking alternative production bases. With nearly 65 per cent of its population under 35 and significant untapped manufacturing potential, India is well placed to benefit.

Finally, the government’s confidence also comes from the opportunity that FTAs create. The EU pact offers Indian exporters preferential access to 450 million consumers across 27 countries—one of the world’s largest and richest markets. Alongside other proposed deals with the United States, Chile, Peru and the Eurasian Economic Union, it could help generate the millions of jobs India needs each year.

However, market access alone does not ensure higher exports or more jobs. To translate access into outcomes, India will need structural reforms that roll back protectionist barriers. Three such reforms will be key.

First, India’s trade regime requires reform. Tariffs on intermediate goods must be reduced if exports are to become a genuine growth engine. Indian firms cannot compete globally if key inputs remain costly. They need reliable access to low-cost components, supported by streamlined customs procedures and simpler regulations to minimise delays. Yet the recent Union Budget left most import duties unchanged, despite the need for rationalisation. India should also rethink its extensive use of Quality Control Orders (QCOs), which function as de facto import barriers. Although a few have been withdrawn, more than 700 remain, disrupting supply chains and creating uncertainty for firms planning production and exports.

Second, while the EU FTA may expand market access, it will not by itself attract large-scale manufacturing investment. That requires a credible investment protection framework. In 2015, India unilaterally terminated around 77 Bilateral Investment Treaties (BITs), leaving foreign investors with limited recourse in disputes with domestic firms or the government. A revised Model BIT introduced in 2016 mandates that investors exhaust domestic legal remedies for five years before seeking international arbitration—terms few countries have accepted. As a result, India now has BITs with only a handful of relatively minor partners, while major global firms remain cautious about committing long-term capital.

Finally, India should seriously consider joining major regional trade groupings such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). These agreements go well beyond tariff cuts. They require members to strengthen domestic standards in labour laws, intellectual property, regulatory transparency and competition policy—areas where India needs reforms, but has found politically difficult to implement.

International commitments can help anchor domestic change. China’s entry into the WTO in 2001 shows how external discipline can accelerate internal reform. Joining high-standard regional agreements would similarly signal that India’s policy direction is stable and long-term. That credibility, in turn, can boost investor confidence and attract greater investment. 

India competes in a global trading system still shaped by China—a dominant exporter with deep manufacturing capabilities and highly integrated supply chains built over decades. In that context, the FTA with the EU is an important step forward. But it must mark the beginning of a larger transformation, not the end of reform. What India needs is a sustained commitment to trade openness. If it wants to become a global manufacturing hub and achieve its “Viksit Bharat 2047” goal, trade agreements must be backed by lower input tariffs, simpler regulations, stronger investment protection and deeper structural reforms.

Global supply chains are being reorganised in real time. The question is not whether opportunities exist—it is whether India will move fast and decisively enough to seize them.

Why growth isn’t saving the rupee

Business Standard January 20, 2026

Last year was not a good one for the Indian rupee. It weakened steadily, even against a soft US dollar, ending 2025 as Asia’s worst-performing currency. Some argue that the rupee’s slide will be a blessing in disguise, giving long-struggling exporters a much-needed boost. Perhaps it will. But before taking comfort, it is worth asking a more fundamental question: Why is the rupee falling in the first place?

The puzzle is sharpened by the apparent strength of the Indian economy. Growth remains brisk, and inflation has fallen to multi-decade lows. It is true that exports have taken a hit from higher US tariffs, with merchandise shipments growing by less than 1 per cent year-on-year between August and December 2025. Yet gross domestic product (GDP) is still projected to expand by 6.5-7 per cent in 2026-27, keeping India firmly in place as the world's fastest-growing major economy.

Ordinarily, such performance would attract foreign capital, as investors chase returns, lifting the currency in the process. That was the pattern during the boom of 2004-08, when equity inflows averaged a little over 2 per cent of GDP and the rupee appreciated by around 2.5-3 per cent a year. This time, the script has flipped. Despite strong growth, the rupee has fallen by more than 5 per cent so far in 2025-26.

What makes the decline more striking is the modest current account deficit (CAD) — around 1 per cent of GDP in April-September 2025. A weakening rupee suggests that even financing so small a gap has become difficult.

The reason lies in a persistent imbalance: demand for rupees has lagged supply, reflecting pressures on both the trade and capital accounts. Merchandise imports averaged about $62 billion a month in 2025, far exceeding exports of roughly $37 billion and leaving a $25 billion trade deficit. Although services exports offset much of this gap, weak goods exports and a rising import bill — driven in part by higher gold and silver prices — have skewed demand towards dollars. Importers are buying more dollars than exporters are supplying, pushing the dollar up and the rupee down.

Normally, such a shortfall would be easy to finance — if capital inflows were behaving as they usually do. Last year, they were anything but normal. In 2025, foreign portfolio investors (FPIs) withdrew about $19 billion from Indian equities on a net basis — the worst outflow on record. This exodus occurred even as capital flows into the broader MSCI Emerging Markets index remained robust. India was a clear outlier.

Foreign direct investment (FDI) has been no more reassuring. This should have been a moment of opportunity, with multinationals diversifying away from China and India opening more sectors to foreign capital while offering incentives through production-linked schemes. Yet investors remain hesitant. Gross FDI inflows have been stuck at around 1.7 per cent of GDP since early 2023, well below the 3 per cent seen in the mid-2000s.

The graph tells the story starkly. Between January 2024 and October 2025, gross FDI inflows averaged about $7 billion a month, while withdrawals ran close to $4 billion, leaving net inflows of barely $3 billion — negligible for a $4 trillion economy. Once rising outward investment by Indian firms, averaging $2-3 billion a month, is taken into account, the picture worsens. In effect, India has received close to zero net FDI each month over the past 22 months.

The conclusion is hard to escape: India has failed to capitalise on the global shift in FDI in any meaningful way. This has in turn soured the mood among portfolio investors who now appear far less confident about India’s long-term growth prospects. Instead, capital is being redirected to East Asia, where economies are seen as better positioned to benefit from the China+1 strategy and the artificial intelligence (AI) boom. Delays to a US-India trade deal have only reinforced this perception. The rupee’s slide reflects this deeper malaise — India’s waning appeal as a destination for foreign capital. The Reserve Bank of India’s heavy interventions in the foreign-exchange market have offered only a temporary fix; a durable remedy lies in reforms that restore credibility and rekindle India’s appeal to global investors. 

All of this places the forthcoming Union Budget firmly in the spotlight. Strong headline numbers — rapid growth, low inflation and a modest current account deficit — have fostered the belief that little needs fixing. That would be a misjudgement. Both foreign investors and domestic firms are signalling that something is amiss, as evident in the prolonged weakness of private investment. The government has taken a few policy steps in recent months. One can only hope that more decisive measures will follow when the Budget is presented on February 1.

Monetary policy needs good data

Business Standard December 16, 2025

The Reserve Bank of India’s (RBI) policy rate cut on December 6 took many analysts by surprise. It came just after the government reported that the economy was growing at a staggering rate of 8.2 per cent. According to the standard macroeconomics playbook, when an economy is growing so fast, central banks are expected to tighten monetary policy — meaning they raise rates pre-emptively — to control inflationary pressures and stop the economy from growing too quickly.

This time, however, the situation was different because inflation has been running at less than one per cent. This comfortable price environment gave the RBI the flexibility to lower rates but it does not automatically justify such a move. The core dilemma remains: Why provide further stimulus to an economy that is already booming at an 8 per cent growth rate?

Does this mean the RBI’s policy decision was misguided? Not really. Rather, the rate cut becomes perfectly understandable when viewed through the lens of the policymakers’ primary dilemma: The need to guide the economy while navigating through a thick statistical fog.

Let us begin by examining the gross domestic product (GDP) data itself. Official figures suggest that growth is soaring, far above last year’s estimated growth rate of 6.5 per cent. On the surface, the expansion appears broad-based and robust, with the manufacturing and services sectors each growing at 9 per cent.

The problem, however, is that these numbers are hard to explain. Some commentators have suggested the cuts in goods and services tax (GST) rates boosted consumer spending, thus raising GDP. But this is unlikely: The tax cuts started on September 22, too late in the July-September quarter to significantly affect the data.  Could other key indicators help provide a clue? Not really. In fact, they raise further questions. 

This sets off a virtuous cycle. Credibility keeps expectations anchored, stable expectations help keep prices low, and low inflation in turn strengthens credibility.

For example, industrial output grew by only 3 per cent during April-September 2025. This is the slowest growth since the pandemic year of 2020-21. The core sectors of mining, manufacturing, and electricity showed slower growth or even contracted. 

Bank credit growth also suggests a weakening economy, with non-food credit — a proxy for credit demand, slowing to 10 per cent in the July-September period from a growth rate of 13 per cent in the previous year. 

Perhaps most worrisome, tax collections have decelerated dramatically. During April-September, the central government’s gross tax collections grew by only 2.8 per cent, the slowest pace in 15 years. Income, corporation tax, and GST all grew in low single digits. 

Finally, it is hard to square strong growth with the weak rupee. The Indian rupee has depreciated by more than 6 per cent against the US dollar this year, making it the worst-performing currency in Asia. While external factors have hurt exports, the current account deficit remains modest at less than 2 per cent of GDP and should, therefore, be easy to fund. But this has not proved possible, thereby putting pressure on the rupee. Capital inflows have remained feeble, and oddly enough, have weakened further after the GDP news was announced. The inability of the fastest-growing country in the world to attract capital seems quite an anomaly. 

In short, it is hard to know how the economy is truly performing. What does this mean for policymaking? 

For the RBI, it makes its job very difficult. To target inflation effectively, the RBI must set interest rates based on its inflation outlook. But if it cannot reliably assess the real strength of the economy, how can it accurately forecast future inflation?

It is true that all central banks find it hard to forecast inflation because food and fuel prices are volatile. They usually fix this by basing their forecast on core inflation, which leaves out these volatile items. However, the situation becomes harder for the RBI when it cannot even forecast core inflation, because it cannot properly judge the underlying strength of the economy.

In such circumstances, policymakers have to adopt an approach based on managing risks. The RBI likely worried that collapsing inflation was causing real interest rates to rise. This, in turn, could severely harm the economy if demand was actually weak. On the other hand, cutting the nominal interest rate would not threaten the 4 per cent inflation target, even if demand turned out to be strong, simply because inflation is so low right now. Therefore, the RBI cut rates. For the same risk-based reason, the government also reduced GST rates.

Both policy decisions were reasonable, but a large problem remains: They may prove wrong if it turns out that demand is, in fact, quite strong. Meanwhile, the inability to come up with accurate macroeconomic forecasts has already confused financial markets. This confusion has potentially weakened policy credibility, creating further problems.

For all these reasons, it is imperative to resolve the data issues. The good news is that the National Statistical Office will soon release updated GDP and consumer price index (CPI) series. We can only hope that these new numbers will mark a significant improvement. Until they do, monetary policy will remain constrained by this data uncertainty.

The good run of inflation targeting: Keep the framework, improve data

Business Standard November 19, 2025 (with Vaishali Garga)

(The authors are, respectively, with the Indira Gandhi Institute of Development Research and Federal Reserve Bank of Boston. The views expressed in this article are solely those of the authors and should not be reported as representing the views of the Federal Reserve Bank of Boston, the principals of the Board of Governors, or the Federal Reserve System.)

Next year a critical policy review looms for the Indian government: Whether to retain or revise the inflation-targeting framework, a cornerstone of India’s monetary policy for a decade. Critics have been pushing for major changes — ranging from tweaking the target number to redefining the target variable, or even shifting the Reserve Bank of India’s (RBI’s) core mandate. However, a major revision now would be unwise because evidence shows that the framework has delivered.

India's formal adoption of inflation targeting in 2016 marked a fundamental shift in the way monetary policy was conducted. Until then, the RBI had been juggling several goals — rapid economic growth, adequate credit flow, and a stable exchange rate. This left its primary responsibility of controlling inflation somewhat diffused. The 2016 reform fixed that by giving the RBI a single, clear mandate: Keep the inflation rate based on the consumer price index (CPI) at 4 per cent, give or take 2 percentage points. This framework made the central bank’s objective both clearer and easier to evaluate.

That said, lower inflation by itself does not prove that the framework has succeeded. Prices can fall for reasons that have nothing to do with monetary policy — like a global drop in commodity prices or strong agricultural output. In fact, studies show that such favourable shocks played a big role in bringing the inflation rate down soon after the framework was introduced. Critics point to this and argue that the success in this respect was driven more by good luck than by sound policy.

But this argument overlooks the real test, which came later. Between 2022 and 2024, global energy and food prices spiked after war in Ukraine started. In India, the food inflation rate averaged about 7 per cent. Yet, barring a few months, the overall inflation rate stayed within the target band for most of this period. This was a sharp contrast to the pre-framework years, when similar shocks routinely pushed the inflation rate into double digits. This stability suggests that something deeper than good luck is at work: The RBI has built credibility.

Credibility is at the heart of any inflation-targeting regime. It captures the public’s confidence that the central bank will follow through on its commitment to keep prices in check. When households and firms trust the RBI, temporary supply shocks, such as spikes in food or fuel prices, do not immediately feed into long-term inflation expectations. In other words, expectations stay anchored. And once expectations are anchored, inflation itself becomes easier to manage because firms are less likely to raise other prices in response to a shock, and workers are less likely to demand higher wages.

This sets off a virtuous cycle. Credibility keeps expectations anchored, stable expectations help keep prices low, and low inflation in turn strengthens credibility.

There are signs that this cycle is beginning to take hold in India. Surveys show that while people still expect the inflation rate to be higher than the 4 per cent target, their expectations fluctuate far less than they once did. Research by RBI economists Sitikantha Pattnaik, G V Nadhanael, and Silu Muduli (2023) finds that households’ inflation expectations have become less sensitive to short-term price movements — another indication that expectations are gradually becoming more anchored.

Studies of professional forecasters show the same pattern. Research by Bhanu Pratap and Kundan Kishor (2023) and by IMF (International Monetary Fund) economists Patrick Blagrave and Weicheng Lian (2020) finds that medium-term inflation forecasts have become more stable and less sensitive to short-term inflation surprises. In our own research (Vaishali Garga, Aeimit Lakdawal Lakdawala and Rajeswari Sengupta, 2022), we find that professional forecasters now expect the RBI to react more strongly to rising inflation than it did before the inflation-targeting regime. Their expectations have also become less responsive to shocks in oil prices. Together, this evidence suggests that India's recent inflation stability is not just the result of favourable global factors. It reflects a steady buildup of policy credibility.

In this context, making major changes to the framework would be risky because it could undermine the credibility that has been built since 2016. This does not mean the framework cannot be improved. Rather, any changes should focus on better data, greater transparency, and clearer communication — not on rewriting the core rules. Two areas for improvement stand out.

First, the RBI's survey of household inflation expectations needs a major upgrade. At present, it asks people mainly about expected price changes over the next three months or one year. The survey should be redesigned to capture households’ longer-term inflation expectations more effectively. This would offer far more useful insights for policy because decisions about saving, investing, or negotiating salaries depend on how people expect inflation to evolve over several years — not just in the near term.

Second, policymakers need better information on what businesses expect. Since firms are the ones that set prices and wages, their view of future inflation is crucial. Yet India currently lacks systematic data on firms’ inflation expectations. The RBI could address this gap by regularly surveying firms and publishing the results. This would help the central bank judge whether price pressures are becoming entrenched and enable it to respond more effectively.

The next decade will bring fresh challenges — climate-related supply shocks, volatile energy prices, and global financial uncertainties. The best way for India to prepare is by preserving and strengthening the RBI’s hard-won credibility. If, instead, the framework is rewritten and trust in monetary policy is weakened, rebuilding that credibility could take another decade or more.

Internationalising the rupee: India's path must diverge from China

Business Standard October 20, 2025

At its last policy meeting, the Reserve Bank of India unveiled several measures to boost the Rupee’s use in cross-border trade—a step toward its gradual internationalisation. The notion that an emerging economy's currency can gain global traction took off after the IMF added China’s Renminbi (RMB) to its Special Drawing Rights basket in 2016. Now, amid renewed geopolitical tensions involving the US, Russia, and China, the question resurfaces: how can India meaningfully advance the Rupee’s journey toward international status?

For the Rupee to become an international currency, non-residents must both want and be able to trade and invest in it. A Russian importer, for instance, should be able to pay for South African goods in Rupees. Likewise, a UK investor should be able to buy Rupee-denominated bonds or shares with ease. In these cases, foreigners—not Indians—bear the currency risk. That shift is the essence of true currency power. It’s also the "exorbitant privilege" the US dollar has long enjoyed.

The willingness and ability to use a currency globally rest on three key conditions. First, the issuing economy must have scale—measured by GDP, trade flows, and volume of international transactions. China, with an $18 trillion economy, meets this bar; India, at around $4 trillion, does not yet. To build that scale, India must sustain a growth rate of 7–8 percent annually over the coming years—a difficult but necessary condition for the Rupee's global ambitions.

Second, the value of the currency must be stable over time. A currency is considered stable when the general level of prices does not vary too much. Stability has multiple aspects: macroeconomic, financial and political. On the macroeconomic front, India has done well. CPI Inflation is at multi-year lows, and the RBI has built credibility in keeping it close to the 4 percent target. Financial stability, too, has strengthened: banks are better capitalised, balance sheets are cleaner, and the broader financial system appears sound.

Political stability is the third pillar. The fact that India is a democracy, like issuers of major international currencies in the 19th and 20th centuries, goes in its favour. Democracy, with its institutional checks and balances, reassures foreign investors about policy credibility and continuity. That confidence, in turn, lends long-term stability to the currency.

Currency stability is often mistaken for the absence of volatility—but the two are not the same. A stable currency reflects true market forces, not central bank management. Its value should be shaped by cross-border capital flows, much like the USD–EUR exchange rate, which stays broadly stable despite constant movement in global finance. Think of it like administered prices: India once controlled prices of essentials like steel and diesel, keeping them artificially steady. Today, those prices fluctuate with supply and demand—and that's a sign of a healthy market. Currency markets should work the same way.

Finally, a currency must be liquid—meaning investors can buy and sell large amounts of assets in it without moving prices. Liquidity depends on deep financial markets and an open capital account. India’s equity market is vibrant, but its debt market remains shallow. History shows that countries with capital controls tend to have thinner markets, while openness to foreign investors boosts liquidity. Yet, more than three decades after liberalisation began, India still maintains extensive controls—especially in its debt and derivatives markets—limiting the Rupee's global reach.

Studies of professional forecasters show the same pattern. Research by Bhanu Pratap and Kundan Kishor (2023) and by IMF (International Monetary Fund) economists Patrick Blagrave and Weicheng Lian (2020) finds that medium-term inflation forecasts have become more stable and less sensitive to short-term inflation surprises. In our own research (Vaishali Garga, Aeimit Lakdawal Lakdawala and Rajeswari Sengupta, 2022), we find that professional forecasters now expect the RBI to react more strongly to rising inflation than it did before the inflation-targeting regime. Their expectations have also become less responsive to shocks in oil prices. Together, this evidence suggests that India's recent inflation stability is not just the result of favourable global factors. It reflects a steady buildup of policy credibility.

This is where India's approach must differ sharply from China's. Beijing has sought to internationalise the RMB while retaining capital controls and a tightly managed exchange rate—a combination no currency has ever succeeded with. China’s advantage lies in scale: it commands over 12 percent of global trade, and in some products, more than half of world exports. That dominance allows it to partially offset the constraints of limited convertibility. India, with only about 3 percent of global trade, lacks that leverage. The contrast shows in the data—the RMB accounts for nearly 9 percent of global FX turnover, while the Rupee lags below 2 percent.

India's best path forward is to gradually ease its capital controls. The RBI and the government have taken meaningful steps since 2020, but more are needed. Alongside this, India should embrace a genuinely flexible exchange rate while ensuring ample hedging options for market participants. Encouragingly, progress is visible: from the near-pegged regime of 2022–24, when INR-USD volatility hit record lows, the RBI has since allowed the currency to move more freely with market forces.

Of course, India cannot liberalise the capital account or adopt a fully flexible exchange rate overnight. One promising approach is to use GIFT City, the International Financial Services Centre, as a controlled experiment. It could become India’s "Hong Kong," with an open capital account, flexible exchange rates, and robust hedging instruments. Over several years, the RBI could gain valuable experience managing such a system, gradually scaling it up to advance the Rupee's journey toward international status.

Making the Rupee an international currency aligns with India’s vision of becoming an advanced nation by 2047. But achieving this over the next two decades will demand sustained, deliberate action. Currency internationalisation is a long journey, requiring multiple building blocks. Indian policymakers must chart a path distinct from China’s, steadily dismantling the barriers that limit the Rupee's global role. Success will hinge on a steadfast commitment to economic reforms that inspire international confidence in the currency.

Reinforcing the Anchor: The Next Five Years of Inflation Targeting in India

Reinforcing the Anchor: The Next Five Years of Inflation Targeting in India, Leap Blog, Sep 25, 2025