The rupee’s depreciation is neither unusual nor indicative of great stress

The recent depreciation of the rupee against the dollar, particularly following the West Asia war, has triggered a familiar wave of concern about external vulnerability and macro stability. This framing, however, rests almost entirely on movements in the nominal exchange rate, which is the wrong benchmark. A look at the real effective exchange rate tells a very different story. The current real depreciation is neither unusual nor indicative of extraordinary stress. In fact, over the past 15 years, the rupee has experienced larger real depreciations on at least 16 occasions. By that standard, what we are witnessing today is well within the range of normal adjustment rather than a signal of crisis.