Why the Rupee’s Volatility Matters More Than Its Current Level

When you glance at the latest exchange‑rate board and see the rupee hovering around the 100‑mark against the dollar, it’s easy to think everything’s fine. That’s exactly the point Neelkanth Mishra, senior economist at a leading research house, keeps making – the number itself is almost meaningless.

"A rupee at 100 or 101 doesn’t change the fundamentals of the economy," Mishra told Moneycontrol. "What really hurts us is the jittery dance it does every single day." He likens the situation to a house built on shaky ground: you might be able to walk inside for a while, but the moment the floor starts to creak, everything gets unstable.

He explains that volatility squeezes three major players. First, importers face higher transaction costs because they can’t lock in rates for long periods. Second, exporters lose the confidence to price competitively when the conversion value keeps swinging. And third, the average Indian consumer sees the price of everyday goods inch upward as import‑linked items become more expensive.

Why is the rupee wobbling now? Mishra points to a mix of global and domestic factors. On the world stage, a stronger US dollar, rising oil prices and geopolitical tensions have pulled capital out of emerging markets. At home, the fiscal deficit remains stubbornly high, while the RBI’s policy rate is still tethered to an inflation target that has been hard to beat.

He adds that foreign portfolio flows, which used to act as a buffer, have become more fickle. "When investors see a country’s currency moving erratically, they pull back, fearing exchange‑rate risk," Mishra notes. The result? A feedback loop where outflows fuel further depreciation, which then scares away fresh inflows.

So what can be done? Mishra suggests a two‑pronged approach. On the supply side, India needs to boost domestic production of oil‑intensive goods and improve logistics to reduce the import bill. On the demand side, the RBI could consider a more flexible, forward‑looking stance – perhaps allowing a modest, predictable depreciation to absorb shocks instead of fighting every tick.

In the meantime, businesses and households should hedge where they can, and policymakers must communicate clearly to calm market nerves. "Stability isn’t about freezing the rate at a particular number," Mishra concludes. "It’s about giving the market a clear, consistent signal that volatility will be limited and predictable."