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Amid a raging war in West Asia, India's growth envisaged for FY27 remains hardwired at 7%+. GoI and RBI have shown acumen and coordination since 2020. The question now is whether the current value of rupee correctly reflects India's macro fundamentals. In fact, EM currencies, including India's, always remain objects of palpable desire for speculators and arbitrageurs in overseas non-deliverable forward (NDF) markets.

But current decline in rupee's value in FY26 (10.6% as of Friday) is reminiscent of the taper tantrum period, when it depreciated by 31% over the 3-yr period ended March 2014. That episode, however, reflected India's weak macro fundamentals. So, what are causes of decline in rupee value this time?

• Portfolio outflows in FY26, at $16.4 bn, are the highest in 28 yrs, with March outflows potentially becoming highest for any month post-1991 if the current trend continues.
• India is likely to have BoP deficit for 3 successive years beginning FY25, and possibly a capital account and current account deficit for the first time since 1991. This is unprecedented. RBI has, indeed, faced the challenges admirably. The good thing is India's CAD would remain relatively anchored at below 1.5% of GDP even in FY27 (against 4.8% during a taper tantrum quarter).
• Even after a tumultuous year, India's exports of goods and services have expanded by 6%. With imports expanding by 20%, India's goods and services trade deficit has expanded at $110 bn from $90 bn in the first 11 mths of current fiscal. So, trade deficit numbers don't warrant a steep currency depreciation as was the case during taper tantrum.

Interestingly, the argument touted by a section that rupee should act as a shock absorber doesn't hold ground beyond a threshold. Exports are insensitive to such exchange rate depreciation, and imports begin to rise more than exports. This results in an actual increase in the trade deficit.

Also, RBI's reserves at around $700 bn (including non-liquid non-currency assets) are adequate, and can be used for any effective forex market intervention even after decomposing it along transaction, precautionary and speculative motives, supplemented by bilateral swap arrangements, as also standby facilities. A depreciating currency, exposed to whims and fancies of exogenous elements, not in sync with macro fundamentals, can be a harbinger of implied weakness, stepping up outflows in a panic-driven period.

On interest rates, RBI has also shown prudence, ensuring adequate liquidity. With yields shooting upwards, reflecting a risk-embedded outlook and tenor premiums, SDLs need to be fully integrated into the market structure, especially when the 16th Finance Commission has walked the extra mile to abolish revenue deficit.

Is there a way out of the current imbroglio to support the rupee through targeted actions? While there are growing calls for a targeted bond offering, tapping funds from the 35 mn-plus Indian diaspora, implicit costs and explicit signals of such moves must be calibrated including all-in-cost options at issuance/redemptions, keeping them as a last resort and strategically aligned with the trajectory of the US Fed unfolding with evolving data points even as the Fed chair changes in May.

In fact, the dollar's sudden advent, unduly benefiting from a lingering war, can be short-lived, and dollar weakening may be on the political agenda as US economy can lose momentum at a time when hyper AI spendings are being questioned and tariffs are restrained by apex courts.

In a multipolar world order, seeking solace in friendshoring with economic interests as ultimate moats reigning supreme, the idea of Brics+ currency (Pay) at this juncture needs careful examination augmented with a parallel collaboration between integrated inter-regional payment/settlement mechanism, viz, SFMS (India), SPFS (Russia), CIPS (China) and SPB (Brazil), chiselled with globally benchmarked AML-CFT measures and other safety mechanisms, as best recourse.

This strategic arrangement, building SFMS as a safe, secure, robust and global messaging system, can facilitate cross-border payment system and promote integrated internationalisation of regional currencies. This could be augmented by gold holdings of select central banks as a backstop facility and increased usage of tokenisation for assets and trade using a decentralised, distributed ledger system.

All this should usher in a counter-cultural movement upping the ante by the 'global south' to reclaim its space on the world stage.