₹100/$ is just a number, let rupee depreciate: Arvind Panagariya’s message to RBI

India should allow the rupee to depreciate instead of trying to defend a psychologically important ₹100-per-dollar level, Arvind Panagariya, chairman of the 16th Finance Commission, said on Thursday, as policymakers weigh options to stem the currency’s sharp slide.

In a series of posts on X, Panagariya said the Reserve Bank of India should not let “the psychology of Rs 100 per dollar determine your policy response,” arguing that depreciation was the appropriate response whether the current oil supply shock proves temporary or prolonged.

“Whether the oil shortage is short-lived or long-lived, the right response at this moment is to let the rupee depreciate,” he said.

The comments come as the rupee hit a record low of nearly 97 per dollar this week amid higher crude oil prices, persistent foreign fund outflows and concerns over India’s widening trade deficit.

According to a Bloomberg report, the central bank is considering options including a possible interest rate hike, additional currency swap auctions, raising dollar deposits from non-resident Indians and even issuance of sovereign dollar bonds.

Panagariya argued that if the oil shortage proves temporary, the rupee could recover once the import bill eases and foreign investors are attracted by a cheaper currency.

“In this case, the rupee will depreciate now but will substantially recover once the oil-import bill shrinks and foreign capital seeks Indian investments precisely to take advantage of the ‘cheap’ rupee,” he said.

If the disruption persists over the longer term, he warned that attempts to defend the rupee through reserve depletion or expensive dollar-raising schemes would ultimately prove unsustainable.

“Trying to defend the rupee will continue to bleed the reserves until they are exhausted,” he said, adding that “eventually, you will have to cross the 100-rupee-per-dollar psychological barrier.”

He also criticised the use of dollar-denominated bonds and high-interest NRI deposits, calling them “costly instruments” that amount to “largely a transfer to rich NRIs.”

India used special FCNR(B) deposit schemes during the 2013 “taper tantrum” crisis to attract foreign currency inflows after the rupee came under severe pressure.

Bloomberg reported that the RBI estimates a similar scheme could potentially attract up to $50 billion this time, compared with about $30 billion in 2013.

Panagariya, however, argued that current macroeconomic conditions differ significantly from 2013, when India was grappling with double-digit inflation.

“This is not 2013,” he said, adding that prudent monetary management had left the economy “well-positioned to absorb some inflationary pressure that will accompany the depreciation.”

The RBI’s monetary policy committee is scheduled to meet on June 3-5. The central bank has kept its benchmark repo rate unchanged at 5.25% this year, although several economists expect a rate hike in the coming months as inflation pressures build.