Former Chief Economic Advisor (CEA) Arvind Subramanian has termed India’s current monetary dilemma a near-impossible challenge for new Reserve Bank of India (RBI) Governor Sanjay Malhotra.
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Subramanian described Malhotra as a “victim” of an unsustainable policy framework and fixed exchange rate inherited from his predecessor, Shaktikanta Das.
During Das’ tenure, the rupee’s volatility was among the lowest in emerging markets, supported by more than $700 billion in foreign exchange reserves. However, according to Subramanian, this policy had reached a breaking point.
“The RBI’s own calculations suggest a significant overvaluation,” he noted, adding that the rupee “needs to fall much further, especially if the US imposes tariffs.”
According to Subramanian, the RBI has only two choices: allow a gradual depreciation of the rupee or accept a sudden and significant decline. Neither option is painless. A slow decline, he warned, risks intensifying speculative pressures, while a quiet decline could disrupt businesses and the economy as a whole.
The rupee recently hit an all-time low of 86.7025 against the dollar, driven by foreign capital outflows totaling $2.7 billion this year, rising oil prices and a stronger dollar. According to a Bloomberg report, Malhotra, who took office in December, would be inclined to allow greater flexibility in daily currency fluctuations to address these concerns, breaking with the rigid controls of his predecessor.
However, Subramanian warned of inevitable turbulence. “This will unfold in real time, amidst clamor and pain,” he said.
While exporters have long demanded a weaker rupee to improve competitiveness, the RBI remains cautious. India imports 90% of its crude oil, and a weaker rupee has a direct impact on the import bill. Subramanian stressed that managing these competing pressures would be a formidable challenge for the RBI.
