Rupee falling against the dollar? Finance Minister Sitharaman explains what the RBI can and cannot do

What happens when the rupee weakens against the US dollar? Imported goods can become more expensive, oil purchases can cost more and inflationary pressures can spread through the economy. But can the Reserve Bank of India (RBI) stop the currency from falling?

Finance Minister Nirmala Sitharaman said on Monday, October 26, that the RBI was taking steps to prevent sudden fluctuations in the rupee’s value, while clarifying that the central bank does not determine its exchange rate.

Why does the RBI intervene in the rupee market?

India follows a market-determined exchange-rate system, meaning the rupee’s value is influenced by demand and supply. The RBI can intervene to curb excessive volatility, but it does not maintain a fixed rate against the dollar. The central bank can sell dollars from its foreign-exchange reserves when demand for the US currency rises sharply, helping ease pressure on the rupee. It can also buy dollars when conditions warrant. Such intervention can smooth abrupt movements but cannot permanently override market forces.

Sitharaman reiterated this distinction after the rupee came under renewed pressure. Reuters reported on October 26 that the currency had weakened for a third consecutive trading session, falling 0.3 per cent to 95.185 against the dollar during the session. Rising oil prices, importer demand for dollars and foreign investor outflows contributed to the pressure.

How does a weaker rupee affect inflation?

India imports a substantial share of its crude oil requirements, with international oil transactions largely priced in dollars. When the rupee weakens, oil companies need more rupees to purchase the same amount of dollars. Higher import costs can affect fuel, transport, manufacturing and the prices consumers pay for goods. Imported machinery, electronic components and fertilisers can also become more expensive. However, the impact on inflation depends on global prices, domestic taxes and how much of the additional cost businesses pass on.

Sitharaman said external factors, including the COVID-19 pandemic, geopolitical conflicts and rising crude oil prices, had contributed to inflationary pressures. She added that the government was taking measures to protect the public from their effects.

What steps has the RBI taken?

On October 10, the RBI announced measures to manage dollar demand, including a special facility to meet the daily dollar requirements of three state-run oil marketing companies: Indian Oil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation. Reuters reported that the facility took effect on October 12. The central bank also tightened rules governing certain foreign-exchange derivative transactions.

These measures aim to ease pressure on the currency market, not guarantee that the rupee will appreciate.

What did Sitharaman say about India’s debt?

The Finance Minister also said India’s fiscal deficit had been declining and that the government was working to reduce the debt-to-GDP ratio to 50 per cent by 2030. The Union Budget for 2026-27 estimates the fiscal deficit at 4.3 per cent of GDP and the Centre’s debt-to-GDP ratio at 55.6 per cent. The government’s stated medium-term goal is to bring the ratio to 50±1 per cent by the end of financial year 2030-31.

At the Platinum Jubilee celebrations of Seethalakshmi Ramaswami College in Tiruchirappalli, her alma mater, Sitharaman also stressed the need to turn women’s educational achievements into economic opportunities.

"Our responsibility now, therefore, is to ensure that progress in education opens greater opportunities for employment, for enterprise, and also for leadership," she said. Highlighting women’s entrepreneurship, she added, "About two thirds of Mudra loans have gone to women helping them establish and expand small businesses."

She also urged colleges to strengthen industry partnerships and prepare students for emerging fields such as artificial intelligence, semiconductors, biotechnology and climate science.

What happens next?

The rupee’s trajectory will depend on oil prices, global dollar demand and foreign investment flows. For households, the concern is whether currency weakness pushes up everyday costs. For policymakers, the challenge is to limit disruptive fluctuations without promising a fixed exchange rate.

Sitharaman’s message is clear: the RBI can help stabilise the rupee, but market forces determine its value.

(With inputs from ANI)