Currency – RBI Urged to Prioritise Economic Stability Over Rupee Milestones

Currency –  The Reserve Bank of India has been advised to avoid treating the Rs 100 per dollar level as a critical benchmark while shaping its monetary response amid ongoing global supply concerns.

Economist and Chairman of the 16th Finance Commission, Arvind Panagariya, said the central bank should allow the rupee to adjust naturally instead of aggressively intervening to defend a particular exchange rate level. His remarks came at a time when global oil supply uncertainties are adding pressure on several emerging market currencies, including the Indian rupee.

Call for a Flexible Currency Approach

In a public message shared on the social media platform X, Panagariya stated that round-number exchange rate levels should not influence policy decisions. According to him, economic realities matter more than psychological thresholds in currency management.

He argued that whether the rupee trades at 99, 100, or 101 against the US dollar should not become the deciding factor for intervention by the Reserve Bank of India. Instead, he suggested that policymakers focus on the broader economic impact of global commodity disruptions, especially rising oil-related costs.

Panagariya maintained that allowing the rupee to weaken under current conditions would be a more practical and sustainable response than using policy tools to artificially support the currency.

Short-Term Oil Disruptions Could Reverse Pressure

The economist explained that if the current stress in oil markets turns out to be temporary, the rupee may eventually regain lost ground without heavy intervention from the central bank.

According to his assessment, a decline in oil import expenses over time could reduce pressure on India’s trade balance. In addition, foreign investors may return to Indian assets once the rupee becomes relatively cheaper, making domestic investments more attractive.

He suggested that market forces would naturally help stabilise the currency once supply-side disruptions ease and investor confidence improves.

Warning Against Prolonged Currency Defence

Panagariya also cautioned against using foreign exchange reserves for an extended period to defend the rupee if global supply disruptions continue for several years.

He noted that persistent intervention could steadily reduce the country’s reserves without delivering a long-term solution. In such a situation, he said, depreciation may become unavoidable despite repeated efforts to maintain a stronger exchange rate.

The economist added that alternative funding measures, including dollar-denominated bonds or higher-interest foreign currency deposits aimed at non-resident Indians, would provide only limited relief. In his view, such steps may temporarily slow the pressure on the rupee but would not eliminate the need for eventual market adjustment.

India Better Positioned Than in Earlier Crises

Panagariya pointed out that India’s current economic position is considerably stronger than it was during earlier periods of financial stress, particularly in 2013.

He highlighted that inflation levels are far more controlled today due to cautious monetary management by the Reserve Bank of India. Because of this, he believes the economy is in a better position to absorb moderate inflationary pressure that may result from a weaker rupee.

According to him, the present macroeconomic environment offers policymakers more flexibility compared to previous episodes of currency volatility.

Concerns Over Costly Foreign Currency Instruments

The former NITI Aayog Vice Chairman also questioned the long-term effectiveness of raising funds through expensive foreign currency instruments.

He stated that offering high-interest returns on dollar-based deposits or bonds could place an unnecessary financial burden on the country. Panagariya argued that such instruments often cost more than the returns generated from India’s foreign exchange reserves, limiting their overall benefit to the economy.

At the time this report was prepared, the Indian rupee was trading at 96.19 against the US dollar.