RBI Should Allow Rupee to Weaken, Says Subbarao
Former RBI chief advises central bank to avoid aggressive rate hikes amid inflation and exchange rate pressures
NEW DELHI, May 29: Former Reserve Bank of India Governor Duvvuri Subbarao has said the RBI should allow the rupee to depreciate gradually to absorb external shocks instead of aggressively defending the currency through monetary tightening.
Ahead of the upcoming Monetary Policy Committee (MPC) meeting scheduled from June 3 to June 5, Subbarao said interest rate hikes should be treated as a last resort and used only if inflation risks worsen significantly.
“The rupee should be allowed to adjust because the present pressure reflects weakness in India’s external balance. A softer currency can act as a natural shock absorber,” Subbarao said in an interview to PTI.
The Indian rupee has remained under pressure due to geopolitical tensions and the ongoing West Asia crisis. Earlier this month, the domestic currency touched a record low of 97.15 against the US dollar.
Market data shows the rupee has weakened nearly 5 per cent since the escalation of the West Asia conflict, over 6 per cent since the start of the year, and more than 10 per cent over the past 12 months.
Subbarao cautioned that exchange-rate instability is largely driven by market sentiment and investor confidence.
“Currency crises become self-fulfilling when investors and importers expect further depreciation. Exporters delay repatriation, importers rush for dollars, and households shift towards gold,” he said.
He stressed that effective communication by policymakers is equally important during periods of volatility.
“Authorities must act firmly without appearing defensive or panicked,” he added.
The former RBI governor said the central bank currently faces a difficult balancing challenge between supporting economic growth, containing inflation, and maintaining exchange-rate stability.
According to him, cutting interest rates to boost growth could worsen inflationary pressures and weaken the rupee further, while steep rate hikes may slow economic activity.
The RBI has already reduced the repo rate by 1.25 percentage points since last year to support growth amid easing inflation. The benchmark repo rate currently stands at 5.25 per cent.
Subbarao suggested that the RBI should closely monitor whether inflationary pressures spread across the broader economy before considering tighter monetary policy.
“A pause in rate tightening may be appropriate given the complexity of the current economic environment,” he said.
The upcoming MPC meeting assumes significance as rising global crude oil prices and higher domestic fuel costs continue to add pressure on inflation.
