My Mother’s Pressure Cooker

When I was a child, I was terrified of my mother’s pressure cooker. Every time it let out a loud whistle, I instinctively thought it was about to explode. Years later, I learnt that the whistle meant exactly the opposite. It wasn’t a warning of failure—it was the mechanism that prevented one.

Today, I think about the Indian rupee in much the same way.

The debate around the Indian rupee is often framed around exports, imports and capital flows. I believe the more important driver over the coming decade will be fiscal arithmetic. Investors often analyse a currency through the lens of trade balances and interest-rate differentials. I believe they should first analyse the sovereign balance sheet and the political incentives that shape it.

India has accumulated a large stock of rupee-denominated obligations through subsidies, free food programmes, welfare schemes such as Ladli Behna, pensions and other social commitments. As these commitments become politically difficult to reverse, they increasingly resemble long-duration liabilities on the sovereign balance sheet. These promises are liabilities in the state’s own currency. History suggests that governments with liabilities denominated primarily in their own currency rarely default outright. Instead, they reduce the real value of those obligations through inflation and gradual currency depreciation.

For politicians, this creates a powerful incentive. They can make generous promises, deliver them in nominal terms, and yet gradually reduce their real economic cost through inflation. Investors should think carefully about the long-term implications of this dynamic.

I therefore believe it is in the long-term fiscal interest of the Indian state for the rupee to depreciate steadily against the US dollar—and even more rapidly against gold. In a democracy where political incentives increasingly favour expanding welfare commitments, currency depreciation becomes the pressure-release valve that allows those promises to be honoured in nominal terms while reducing their real economic cost over time.

The obvious counterargument is that a weaker rupee makes imports more expensive. While this is true in principle, India’s primary external vulnerability is oil. Other imports, such as fertilizers and industrial inputs, are comparatively manageable. More importantly, I believe the medium-term outlook for oil prices is structurally lower as significant new supply from South America enters global markets. If oil trends towards US$50 per barrel, India gains the rare opportunity to allow a weaker currency without importing the same degree of inflation that would normally accompany such depreciation.

The rupee should not be viewed merely as an exchange rate. It is a fiscal adjustment mechanism. Like the whistle on my mother’s pressure cooker, gradual currency depreciation releases pressure that would otherwise continue to build within the sovereign balance sheet. Without that safety valve, the adjustment eventually has to come through painful fiscal reforms, significantly higher taxation, much slower growth, or, in the extreme, a fiscal crisis.

For that reason, I expect the rupee to depreciate not only against the US dollar, but even more persistently against gold. Gold measures the long-term erosion of purchasing power; the dollar merely measures the value of one fiat currency against another.