RBI Warned of Potential Currency Imbalance Amid Exchange Rate Concerns

RBI Should Allow Rupee to Depreciate, Says Economist Arvind Panagariya

Economist and Chairman of the Sixteenth Finance Commission Arvind Panagariya has urged the Reserve Bank of India (RBI) to allow the Rupee to depreciate if necessary, rather than treating the Rs 100-per-dollar mark as a trigger for policy intervention.

According to a post on X, Panagariya stated that India is in a much stronger position to handle external shocks compared to 2013. He emphasized that the RBI should not be swayed by the psychological barrier of the Rs 100-per-dollar mark, but rather focus on allowing the Rupee to depreciate in response to external pressures.

Panagariya argued that a temporary oil shortage, which he estimated would last between 3 months to a year, would eventually reverse pressure on the currency. In this scenario, the Rupee would depreciate initially, but would subsequently recover once the oil-import bill shrinks and foreign capital seeks Indian investments, taking advantage of the 'cheap' Rupee.

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However, if the oil shortage is prolonged, Panagariya warned that defending the currency aggressively would hurt India's foreign exchange reserves. He estimated that the oil shortage could last for one to an unknown number of years, making depreciation the only viable option.

Panagariya also dismissed alternative measures such as dollar-denominated bonds or high-interest NRI deposits as temporary solutions, stating that they would only provide a band-aid solution and would eventually require the Rupee to cross the 100-rupee-per-dollar psychological barrier.

In comparison to the economic stress of 2013, Panagariya noted that inflation is now under far better control. In 2013, inflation was in the double digits, whereas now it is under control due to the RBI's prudent monetary management. As a result, the economy is well-positioned to absorb some inflationary pressure that would accompany depreciation.

Panagariya also criticized the use of dollar-denominated bonds and NRI deposits, stating that they are expensive because they offer returns much higher than what India earns on its foreign currency reserves. He described this as a transfer to rich NRIs.

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Note: The inflation rate in 2026 is not explicitly stated in the text, so it is assumed to be 'under control' based on Panagariya's statement.