Finance Commission Chairman Advises RBI Against Rupee Defense
16th Finance Commission Chairman Arvind Panagariya has advised the Reserve Bank of India (RBI) not to let the psychological barrier of ₹100 per dollar dictate policy and to allow the rupee to depreciate gradually. He suggests this is a more sustainable approach than depleting foreign exchange reserves. Panagariya believes India's current economic conditions are strong enough to absorb moderate inflationary pressures arising from a weaker rupee, drawing a contrast with the 2013 currency crisis. His remarks come amid heightened rupee volatility.
Key Highlights
- Arvind Panagariya urged RBI not to fear the ₹100/$ psychological mark.
- He advises gradual rupee depreciation over defending it with forex reserves.
- India's economy is better positioned to handle rupee depreciation than in 2013.
- Prolonged oil shortages might drain reserves if rupee is defended.
- Other measures like dollar bonds are seen as temporary fixes.
Arvind Panagariya, the Chairman of the 16th Finance Commission and a prominent economist, has advised the Reserve Bank of India (RBI) to refrain from intervening excessively to defend the Indian rupee against a depreciating trend that is nearing the psychological threshold of ₹100 to a US dollar. In a series of posts on the social media platform X, Panagariya asserted that '100 is just a number' and that policymakers should not allow this psychological barrier to dictate their monetary strategy. He suggested that a gradual depreciation of the rupee is a more appropriate response to the current economic pressures, particularly the ongoing oil price shock, compared to depleting foreign exchange reserves in an attempt to artificially prop up the currency..
Panagariya elaborated on two scenarios regarding the oil shortage. If the shortage is short-lived, lasting between three months to a year, he believes the rupee will depreciate now but will substantially recover once the oil import bill shrinks and foreign capital is attracted to India due to the cheaper rupee. In such a scenario, attempting to defend the rupee would be futile and would only serve to drain reserves without achieving lasting stability..
However, if the oil shortage proves to be long-lasting, extending beyond a year, Panagariya warned that any measure other than allowing depreciation would be a 'losing proposition.' He cautioned that defending the rupee in such a prolonged situation would continue to deplete reserves until they are exhausted. He also expressed skepticism about the efficacy of other proposed measures, such as dollar-denominated bonds or high-interest NRI dollar deposits, referring to them as expensive stop-gap measures or mere 'band-aids' that might primarily benefit wealthy overseas investors rather than providing a sustainable solution..
Panagariya drew a parallel with the 2013 currency crisis, emphasizing that India's macroeconomic conditions today are significantly stronger. He noted that during the 2013 crisis, inflation was in double digits, whereas current inflation is relatively contained. This stronger economic footing, he argued, positions the economy better to absorb any moderate inflationary pressures that might arise from a weaker rupee..
His remarks come at a time when the rupee has experienced significant volatility, with the one-year forward market briefly crossing the ₹100 per dollar mark and the rupee nearing record lows in intraday trade. While the rupee showed a partial recovery on Thursday, May 21, 2026, following a decline in crude oil prices and a potential RBI intervention, market analysts remain cautious..
Arvind Panagariya was appointed as the Chairman of the 16th Finance Commission on December 31, 2023.. The Finance Commission is a constitutional body tasked with recommending the distribution of tax revenues between the Union and the states, among other fiscal matters. The 16th Finance Commission is expected to submit its report for the five-year period from 2026-27 to 2030-31 by October 31, 2025..
This perspective aligns with Panagariya's previous views on currency management. In April 2022, he had suggested that the RBI could allow the rupee to depreciate a bit to manage outflows and oil price increases.. More recently, in May 2026, he also advocated for allowing the rupee to depreciate to manage the current account deficit, making imports more expensive and exports more attractive.. He has also historically endorsed India's approach to managed depreciation, citing the transformative impact of the 1991 devaluation..
The current exchange rate for 1 US dollar is approximately ₹96.36 as of May 21, 2026.. Earlier on Thursday, May 21, 2026, the rupee had closed at ₹96.37 against the US dollar, after earlier touching intraday lows.. The one-year forward rate had crossed ₹100 per dollar..
Frequently Asked Questions
What is Arvind Panagariya's main advice to the RBI regarding the Indian Rupee?
Arvind Panagariya advises the RBI not to be overly concerned about the rupee crossing the psychological barrier of ₹100 to a US dollar. He recommends allowing the rupee to depreciate gradually rather than intervening heavily to defend it, suggesting this is a more sustainable approach that avoids depleting foreign exchange reserves.
Why does Panagariya believe allowing rupee depreciation is beneficial?
Panagariya argues that in scenarios of oil shortages, a depreciating rupee can help manage the current account deficit by making imports more expensive and exports more competitive. He also believes India's current economic conditions are robust enough to absorb the potential inflationary impact of a weaker rupee, unlike in past crises.
What are the potential consequences of the RBI defending the rupee, according to Panagariya?
He warns that attempts to defend the rupee by selling foreign exchange reserves can lead to a significant depletion of these reserves, especially if economic shocks like oil shortages are prolonged. He views measures like dollar-denominated bonds as temporary fixes that do not address the fundamental issue.