Finance Commission Chairman Arvind Panagariya has advised the Reserve Bank of India (RBI) against intervening to defend the Indian Rupee, particularly as it approaches the psychologically significant ₹100 per US dollar mark. Panagariya contended that the ₹100 level is merely a number and should not dictate policy decisions, especially in response to current oil price shocks.
On Wednesday, the rupee hit a new record low of 96.95 against the US dollar, closing at 96.86. Although it rebounded slightly on Thursday to 96.37 after crude oil prices eased, the currency remains under pressure.
Depreciation as the Right Response
Panagariya, a noted economist, argued that allowing the rupee to depreciate is the most practical course of action, regardless of whether the oil shortage proves temporary or prolonged. He explained that if the shortage is short-lived, the rupee would naturally recover once oil import bills shrink and foreign capital is attracted by a 'cheap' rupee for investments.
Conversely, if the disruption is long-lasting, any attempts by the RBI to defend the rupee through reserve depletion or costly dollar-linked instruments would ultimately fail. Panagariya warned that such efforts would continuously drain reserves until they are exhausted, proving to be a losing proposition.
Dismissing Temporary Fixes
The economist also dismissed dollar-denominated bonds and high-interest NRI deposits as mere 'band-aids' that offer only temporary relief. He asserted that these are costly instruments that largely transfer gains to wealthy overseas Indians and would not prevent the eventual crossing of the 100-rupee-per-dollar psychological barrier.
Distinction from the 2013 Crisis
Panagariya drew a clear distinction between the current situation and the 2013 currency crisis. He highlighted that in 2013, India faced double-digit inflation and significant macroeconomic stress. Thanks to the RBI's prudent monetary management, inflation is not currently a major concern, positioning the economy to absorb some inflationary pressure that might accompany depreciation.
His comments underscore a call for the RBI to prioritize market mechanisms and long-term economic stability over short-term psychological thresholds in managing the Indian Rupee.