Arvind Panagariya’s advice to RBI: ‘100 is just a number; let rupee depreciate or reserves will bleed out’

In a post on X, the 16th Finance Commission Chairman said the RBI should not allow the “psychology” of the Rs 100-per-dollar mark to dictate policy decisions.

“Do not let the psychology of Rs 100 per dollar determine your policy response. 100 is just a number, like 99 and 101. Whether the oil shortage is short-lived or long-lived, the right response at this moment is to let the rupee depreciate,” Panagariya wrote.

Panagariya’s remarks came as the rupee touched the key 100-per-dollar mark in the one-year forward market on Wednesday, signalling that currency markets are pricing in a weakening bias for the USD/INR pair over the next 12 months.

According to him, if the current oil shortage lasts only for a few months to a year, the rupee may weaken initially but could later recover significantly once India’s oil import bill declines and foreign investors return to take advantage of a cheaper currency.

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However, if the oil shock turns out to be long-lasting, Panagariya warned that trying to artificially defend the rupee would only drain India’s forex reserves over time.

“A resort to anything other than depreciation will be a losing proposition. Trying to defend the rupee will continue to bleed the reserves until they are exhausted,” said the former Niti Aayog vice chairman.

Panagariya also cautioned against relying heavily on dollar-denominated sovereign bonds or high-interest NRI dollar deposits to support the currency, calling them temporary and expensive measures.

“Eventually, you will have to cross the 100-rupee-per-dollar psychological barrier,” he added.

Drawing comparisons with the 2013 currency crisis, Panagariya said India’s macroeconomic situation today is much stronger. He noted that inflation was in double digits in 2013, whereas current inflation levels remain relatively controlled due to prudent monetary management by the RBI.

“This is not 2013. The economy is well-positioned to absorb some inflationary pressure that will accompany depreciation,” he said.

He further argued that instruments such as high-interest NRI dollar deposits effectively amount to a transfer of wealth to richer depositors, while costing India more than what it earns on its own foreign currency reserves.

The rupee rebounded 50 paise from its all-time closing low to settle at 96.36 against the US dollar on Thursday after crude oil prices retreated from elevated levels amid signs of easing geopolitical friction, alongside likely central bank intervention. Forex traders said the rupee had gained after the recent geopolitical developments, but investors are still gauging the geopolitical risk and oil price sensitivity in the background.