The Indian rupee is facing significant downward pressure, recently hitting a record low of 97.15 against the US dollar. Former RBI Governor Duvvuri Subbarao argues that allowing the rupee to depreciate could serve as a natural shock absorber for the economy, particularly amid external pressures stemming from geopolitical uncertainties. He emphasizes that the RBI should use liquidity measures as a primary tool to manage inflation risks rather than resorting to aggressive rate hikes, which could stifle economic growth.
Subbarao's comments come at a critical juncture, with the RBI's Monetary Policy Committee set to meet soon to decide on interest rates. The central bank has already reduced the repo rate by 1.25% since last year, but the balancing act between controlling inflation and supporting growth remains precarious. Currently, the repo rate stands at 5.25%, and any further tightening could exacerbate economic challenges.
The former governor highlights that the rupee's depreciation reflects a deterioration in India's external balance, exacerbated by rising crude oil prices and inflationary pressures. He warns that if market participants believe the rupee will continue to weaken, it could trigger a self-fulfilling prophecy, leading to further capital outflows and economic instability. Investors, importers, and households may react by rushing to secure dollars or gold, thereby intensifying the rupee's decline.
