Economic Power Needs a Weaker Currency

 

Rising industrial powers have repeatedly treated currency competitiveness as a growth tool. From the United States’ push to weaken the dollar under the Plaza Accord, to China’s decades-long resistance to letting the renminbi appreciate under U.S. pressure, the pattern is consistent: when manufacturing wants to scale, exchange-rate policy becomes strategic. India’s central bank, however, has largely done the reverse.

The Plaza Moment: Currency, Not Industry

In September 1985, Noboru Takeshita—Japan’s finance minister—left Tokyo under cover of a private golf outing, then flew to New York. The secrecy mattered because Japan had spent the prior decade deliberately keeping the yen weak, building trade surpluses against the United States, and resisting American demands for currency appreciation.

That resistance ended with the Plaza Hotel meeting—secretive, urgent, and decisive.

A Secret Agreement to Weaken the Dollar

That evening, Takeshita joined U.S., West German, French, and British finance ministers at the Plaza, summoned by Treasury Secretary James Baker. The meeting was not about Detroit’s competitiveness alone. It was about fixing the exchange rate as the instrument of adjustment.

When discussions ended, the U.S. had persuaded allies to help weaken the dollar, and Japan agreed to let the yen rise. Over the next two years, the dollar fell sharply—from roughly 240 yen to around 150—and then dropped below 130 soon after. Detroit gained breathing room it could not have earned on policy alone.

The Trade-Off Japan Accepted

Japan’s acceptance came with consequences. The yen’s rise helped fuel an asset bubble, later contributing to a banking crisis and decades of slower growth. Still, Plaza represented strategic clarity for the country that chose to bargain.

For the country that arrived quietly and negotiated in private, the cost was also political: being a creditor in an American century.

China Took the Opposite Path

China watched Japan’s agreement and moved differently. Through WTO complaints, Treasury reports, and pressure from multiple U.S. administrations, Beijing was accused of currency manipulation. Yet the renminbi stayed constrained.

Beijing’s logic was clear: if the exchange rate rose faster than China’s industrial strategy required, Chinese manufacturing would be priced out of global markets before reaching scale. So the renminbi remained relatively cheap—and exports accumulated.

Weak Currencies, Strong Strategies

These were not “weak” countries seeking comfort from weak money. They were serious economies using policy choices aligned with the stage of development. Growth needs direction, not just stability.

Why Competitive Currencies Matter

The logic is straightforward. A developing economy does not become rich by buying the world’s output at a prestigious exchange rate. It becomes rich by selling more of its own output to the world.

A competitive currency:

• lowers the foreign-currency price of exports,
• raises the domestic payoff from export production,
• draws investment into tradable sectors, and
• shifts scarce foreign exchange away from luxury consumption and toward productive capacity.

If industry is ready, depreciation is not merely a number changing on a screen—it changes the structure of growth.

India’s Timing: Capacity Built Under a Defended Rupee

India, by contrast, has resisted that adjustment. From 2022 through 2024, the Reserve Bank of India delivered unusually low rupee volatility, holding the currency comparatively steady against the dollar while other emerging markets adjusted. The rupee was defended as a matter of “honour” rather than deployed as an instrument.

This occurred during the period when production-linked incentive (PLI) schemes were building real capacity. Mobile phone imports reportedly fell sharply from FY21, and India scaled into becoming one of the world’s largest smartphone producers. The country was also ramping up industrial capability across multiple PLI sectors—factories that did not exist years earlier are shipping today.

Exchange Rate Meets the Export Chain

That matters because exchange rates decide whether a country captures global market share or hands it back to competitors. Capacity sits at the exact point in the export chain where currency competitiveness becomes pivotal.

But while PLI was building export capability through fiscal incentives, the central bank spent reserves to keep the rupee from doing the work that those incentives were meant to unlock. The two policy arms pulled against each other.

Paying the Fiscal Bill Twice

India has already paid the fiscal cost of building capacity through PLI. Refusing to let the exchange rate work now forces the country to pay twice:

1. through PLI outlays to build capacity, and
2. through reserve spending to prevent the currency from helping monetize it.

Even so, the rupee has since moved lower—past the mid-to-high 90s per dollar. Reserves have declined sharply, and market pressure has increased: foreign portfolio investors have reportedly withdrawn substantial amounts from Indian equities, while net FDI has been thin around turning points. Additional measures—including higher gold duties—and public requests to reduce gold purchases and certain spending reflect the severity of the moment.

The Real Lesson from Japan

If commentators were correct that the “psychology” of the exchange rate is the main issue, Japan would still be a cautionary tale for the wrong reason. The yen trades above 150 to the dollar today, yet Japan is not a failed state. It remains a developed economy with deep manufacturing and long-built net foreign assets. The productive base speaks louder than the exchange board.

The Problem Isn’t the Weaker Rupee—It’s the Delay

The real issue is not that India has a weaker rupee. The issue is that India spent decades without building enough export structure to make currency weakness manageable—or useful.

Once capacity began to come online, a different exchange-rate policy should have been in place long before this crisis demanded action.

The Creditor Path Is a Sequence, Not a Shortcut

Geoffrey Crowther described a pattern visible across major economies: countries begin as debtors, build manufacturing exports, generate trade surpluses, and only later graduate to creditor status. Britain, America, Japan, Korea, and China followed that road in order.

Currency strength typically arrives at the end of the journey, not at the beginning. India is trying to skip the line: demanding the prestige of a firm currency while manufacturing sits at relatively low levels and the import bill remains heavy.

The Ghost of 1991 Still Runs the Policy

India’s rupee politics still reflects trauma from 1991. In May and July of that year, emergency financing required gold to be moved as collateral—reportedly including shipments of 67 tonnes—while reserves fell to extremely limited coverage. The rupee was devalued quickly, and India entered an IMF structural adjustment programme.

That episode entered national memory as humiliation. Since then, many decisions by the RBI have operated under the shadow of that fear.

What the Trauma Narrative Misses

The deeper question is what devaluation actually enabled. During the 1990s and 2000s—when the rupee was weak and stayed competitive—India’s services sector found its global moment. The wage arbitrage that underpins hundreds of billions in services exports today depended on a competitive exchange rate.

Services also required fewer of the inputs that manufacturing needs. Manufacturing demands ports, reliable power, supplier ecosystems, land logistics, and labour flexibility. Today, those constraints are less binding than before due to PLI, infrastructure spending, and geopolitical realignment like China+1.

What built services was a competitive currency meeting prepared capacity. That condition now increasingly holds for manufacturing too.

A Tool, Not a Shame: Competitive Depreciation as Policy

A currency that weakens in a crisis is a symptom of failure. A currency managed competitively during development is an instrument. China, Japan, and the United States understood that distinction when it mattered. They were not ashamed of competitive currencies; they engineered them.

The Policy India Still Needs

India is already doing pieces of what a coherent strategy would require: higher gold duties to ration a non-essential import, messaging aimed at reducing foreign travel and dollar demand, and a shift from defending fixed levels toward smoothing volatility.

But these measures are reactive—firefighting rather than framework.

A Coherent Package: Direction + Protection + Industrial Use

India can make deliberate depreciation socially viable because it has stronger targeting capacity than in earlier decades. Direct Benefit Transfers reach hundreds of central schemes and thousands of state programmes. This makes it possible to shield the bottom 40–50% from import-price pass-through with fine-grained precision.

Protect what truly matters—food, essentials, public transport, fertiliser, and cooking fuel. Let upper-income import preferences adjust.

A coherent package then becomes:

• managed depreciation that reduces volatility without blocking direction,
• targeted cushioning for essential consumption,
• industrial policy that directs exchange-rate benefits into manufacturing investment, and
• reserve management that preserves capacity for genuine shocks rather than routine delay.

The Cost of “Delaying the Inevitable”

The danger is not a rupee at 100. The danger is arriving there after burning reserves to postpone adjustment. That is the most expensive route to the same destination.

The Path to Economic Power Runs Through a Weaker Currency

India is not exempt from the rule. In fact, it is the country most determined—so far—to behave as if the rule does not apply.