What happens if the dollar hits ₹100? | Let Me Explain 143 | Pooja Prasanna

 "100 is just a number."

That's how Shamika Ravi, a member of the PM's Economic Advisory Council, responded to concerns that the rupee could soon slide to ₹100 against the dollar.

And at first glance, it sounds like a rational take. 

Why panic over a number? 

Why treat exchange rates like a cricket score?

And why should the government spend billions trying to defend an exchange rate that may no longer reflect economic reality?

The problem is that while the number itself may be arbitrary, the economics behind it are not.

In fact, anyone making the opposite argument is overlooking some fundamental realities about how the Indian economy works and why policymakers, investors and central banks pay such close attention to exchange rates in the first place.

Because such statements assume that India can comfortably absorb a weaker currency and live with the consequences. 

But  sooner or later, it shows up somewhere.

And ultimately, in bills that businesses and households have to pay.

Including you and me.

Let me explain.

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Now, let's get into today's story.

The strongest criticism of Shamika Ravi's remarks is not that she believes the market should decide the rupee's value. 

Most economists would agree with that. Former IMF chief economist Gita Gopinath, for instance, has been arguing that India should allow the rupee to respond to economic fundamentals instead of defending it aggressively.

The real issue is that Shamika Ravi’s argument assumes that if the rupee weakens, India can simply absorb the impact and perhaps even benefit from it.

But India's economy doesn't work that way.

The idea behind advocating for a weaker currency is fairly straightforward. 

When the rupee falls, Indian goods and services become cheaper for foreign buyers. That can make Indian exports more attractive, help companies sell more abroad and bring more money into the country. 

In theory, this acts like a natural shock absorber when the economy comes under pressure.

But it works best in economies that make most of what they need at home and earn a large share of their income by selling goods to the rest of the world.

India is not there yet.

We import most of our crude oil. We import natural gas. We import electronic components, semiconductors, industrial machinery, chemicals and fertilisers. Even many Indian companies that export goods rely on imported raw materials, equipment or energy.

And that changes the equation.

Because a weaker rupee does not just make exports cheaper. It also makes imports more expensive.

Take crude oil. Suppose oil is trading at $100 a barrel. If the exchange rate is ₹80 to the dollar, India pays ₹8,000 for that barrel. If the rupee weakens to ₹100 against the dollar, India now has to pay ₹10,000 for exactly the same barrel.

This is just arithmetic.

Nothing about the oil has changed. It is the same barrel, bought from the same supplier, at the same dollar price.

Yet India's bill has gone up by 20%.

Oil is not just another import. 

It powers transport, manufacturing, logistics and large parts of the economy. When oil becomes more expensive, transporting goods becomes more expensive.

Then food prices are affected. 

Manufacturing costs rise. Delivery costs rise. Businesses facing higher costs eventually pass at least some of those costs on to consumers.

What begins as a movement in the currency market eventually shows up in grocery bills, electricity bills and household budgets.

This is why economists pay attention to exchange rates. Not because they are obsessed with a number on a screen, but because exchange rates influence prices throughout the economy.

And this is where Ravi's argument runs into a problem.

She has suggested that policymakers should focus on inflation rather than exchange rates. 

But for a country like India, the two are closely linked as I explained.

Economists have a technical term for this, the exchange-rate pass-through. The idea is simple. If the rupee buys less from the rest of the world, Indians often end up paying more for goods and services at home.

So it is difficult to separate inflation from exchange rates because one often affects the other.

Now, supporters of Ravi's position would point out that a weaker rupee can also bring benefits. And they are not entirely wrong.

A weaker currency can help exporters. An American company buying Indian software services, textiles or pharmaceuticals may find them more attractive if the rupee weakens. Exporters also earn more rupees when they convert their dollar earnings back into Indian currency.

This is probably the strongest argument in Ravi's favour.

But even here, the reality is more complicated.

Like i said earlier, many Indian exporters depend on imported goods. So while they may earn more from exports, they also have to spend more on the things they need to produce those exports.

The gains are often smaller than they first appear.

And there is another important point.

Not everyone benefits from a weaker rupee in the same way.

An IT company earning dollars from overseas clients might gain. 

A pharmaceutical exporter might gain. 

A large manufacturer selling products abroad might gain.

But a family or a small business paying more for fuel or a student planning to study overseas is likely to lose.

That matters because it changes how we think about currency depreciation.

It is not just a technical adjustment happening in financial markets. It is a shift in who bears costs and who receives benefits across the economy.

If exchange rates are largely unimportant, why do central banks spend so much time worrying about them?

The Reserve Bank of India certainly does not behave as though the rupee is "just a number". 

The RBI often steps in to reduce excessive volatility by selling dollars and introducing market friendly measures.  

The goal is not necessarily to defend one specific exchange rate.

The goal is to prevent a sharp fall in the rupee 

Because they know that exchange rates affect everything from inflation and investment to borrowing costs and business confidence. 

A weaker rupee can make it more expensive for companies to repay foreign loans. 

It can make investors nervous about putting money into the country. It creates uncertainty for businesses planning future investments.

Perhaps the biggest flaw in Ravi's argument is that it treats the rupee simply as a mechanism that helps the economy adjust. In reality, the rupee is also telling us something.

A currency can weaken for many different reasons.

It might weaken because the economy is importing large amounts of machinery and equipment to build factories and expand production. That could actually be a sign of future growth.

Or it might weaken because oil prices have surged, investors are moving money elsewhere, or demand for dollars is rising faster than demand for rupees.

Those are very different stories.

Which is why economists, investors and central banks do not just look at the number itself. They look at what is driving it.

And that brings us back to Ravi's remark.

Yes, people should not panic simply because the rupee touches a round number like ₹100. 

But neither is it just a number.

Let’s hope that millions of Indians won’t end up feeling the impact. Then it would become far more real than a number flashing on a screen.

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