Instead of aggressively protecting the rupee by raising interest rates, former Duvvuri Subbarao has advised the Reserve Bank of India to permit additional rupee depreciation to absorb external economic pressures.
A weaker currency serves as a “natural shock absorber” during times of external imbalance, according to Subbarao, who made this statement before the RBI’s next Monetary Policy Committee meeting. He emphasized that the final recourse for exchange-rate defense should be monetary policy.
Due to geopolitical concerns and rising crude oil prices associated with the West Asia crisis, the rupee recently hit a record low of 97.15 against the US dollar. The currency has lost more than 10% of its value during the last year, according to market data.
Subbarao cautioned that market confidence and sentiment are frequently the driving forces behind exchange-rate crises. He pointed out that when prospects of additional devaluation increase, investors, importers, and exporters often respond defensively.
He acknowledged the concerns of inflation but recommended that the RBI should use methods for managing liquidity rather than raising repo rates right away. The central bank must strike a careful balance between promoting growth, reining in inflation, and preserving currency stability.
Source – The Economic Times
