Capitalmind CEO Deepak Shenoy on Wednesday said that the rupee can appreciate 15-20% in the next two years if the RBI does not intervene and allow a free market. He also said the central bank is not doing enough to stop the decline of the rupee, which recently logged its steepest single-day fall in nearly two years, closing at 86.62 against the US dollar.
"If you allow a free market, in two years, the rupee will appreciate by 15-20%," he said in an interview with ThePrint. "Because India is a very rapidly growing country. It's one of the countries that will attract investment from around the globe. If that investment were to come in and the RBI was not to buy it, the rupee would appreciate because the demand of rupees would be higher than the supply of rupees or the higher than the demand of dollars."
Shenoy further explained the market dynamics: "When you bring dollars and say give me rupees instead, if you keep on bringing me dollars I'll just keep giving you less rupees for each time. Because the demand is so high - it's like if there is something heavily in demand its price goes up."
When asked why the rupee was falling, Shenoy said the rupee was depreciating because "the RBI is not doing enough". He said the central bank controls almost all the dollars that India owns. "It doesn't allow other people to own dollars. If you consider the overall ownership of dollars in the system, most of it is owned by the central bank. So when people want dollars, who else they will go to - the central bank."
He argued that the lack of a robust market for dollar transactions limits currency stability. "If you were allowed to have dollars more meaningfully, you would have actual capital account convertibility of some sort, then the banks could own significantly higher amounts of dollars and the market could themselves then meet all these demands. When we don't have a market of that size, RBI's participation determines whether the rupee appreciates or depreciates."
When asked whether recent depreciation was more alarming, the noted fund manager said if one looks at the difference of inflation between India and the countries that we deal with. India's inflation is something like 4.5-5% whereas the US is at about 2.5 to 3%. The differential of 2.5% is what the rupee should depreciate by every year roughly, he said.
"But we've depreciated 2.5% in the last month. Before this, the US inflation was even higher. We should have appreciated but we depreciated because of the RBI. The central bank participated in the forex market to force the rupee to depreciate on the excuse of building reserves. We don't need these reserves. We have a problem right now because dollars are going out and RBI is not selling enough - they should be selling a lot."
Shenoy suggested that RBI should sell more dollars to stop the slide of the rupee. "The RBI bought about $100 billion in the last two years. So why shouldn't they sell most of it? We did see this kind of (FII) outflow in the past. But in that time, the RBI did sell and therefore the rupee was more stable. Now, they suddenly decided not to sell which is strange because we should be allowing the rupee to appreciate as well. If you're letting it go on the downside, you should let it go on the upside. Let it become 60-65 rupees when flows come in."
India’s foreign exchange reserves stood at $634.585 billion in January 2025, down from a peak of $704.885 billion in September 2024. Shenoy argued that these reserves far exceed the country's needs. "What you (RBI) need is much less than what you already saved. So you have got your reserves for 6-10 years. Even five-six years of current account deficits will be only $250 to $300 billion."
The Capitalmind CEO said India can build more reserves by allowing its domestic citizens to invest abroad through Mutual Funds. "Their (MFs) limits (to invest in foreign stocks) are $8 billion. Make it $100 billion. Let $100 billion be held by Indian citizens through mutual funds abroad. If there is a crisis you can always bring that money back. Force them to sell and bring the money back. that's not a problem. but then the people hold that money, not the RBI."
Shenoy questioned the utility of maintaining such high reserves and whether they would be useful in a crisis-like situation. "What Russia did...Russia didn't say I'll pay you dollars despite my dollars being sequestered by America. They just shut down these American businesses in Russia and said boss you guys stole my dollars I will steal your companies which have come to me. That is exactly what will happen in an extreme crisis."
"That is the solution for the extreme situation. You don't need this level of dollar reserves. And what's the point of these dollar reserves? Tomorrow, if we have a skirmish with Pakistan and America says we'll freeze all your dollars. What are you going to do with that? The traditional mechanism of what RBI has been using to determine whether the rupee is higher or lower than it should be is wrong."