Former Chief Economic Adviser (CEA) Arvind Subramanian calls India's current currency dilemma an impossible challenge for new Reserve Bank of India (RBI) governor Sanjay Malhotra.
In a detailed note on X, Subramanian outlined eight key points about why the rupee's fall is inevitable and the tough choices facing the central bank.
Subramanian described Malhotra as a “victim” of an unsustainable policy framework and exchange rate inherited from his predecessor Shaktikanta Das.
During Das' tenure, the rupee's volatility was among the lowest in emerging markets, supported by over $700 billion in foreign exchange reserves. However, Subramanian argued, this policy has reached a breaking point.
“The RBI's own calculations suggest a huge overvaluation,” he noted, adding, “The rupee will have to fall much further, especially if the US imposes tariffs.”
According to Subramanian, the RBI has only two choices: allow the rupee to depreciate gradually or accept a sudden and significant drop. Neither option is painless. A slower decline risks intensifying speculative pressures, he warned, while an isolated fall could disrupt companies and the wider economy.
The rupee recently hit a record low of 86.7025 against the dollar, driven by outflows totaling $2.7 billion this year, higher oil prices and a stronger dollar. Malhotra, who took office in December, is said to be leaning towards allowing more flexibility in daily currency fluctuations to address these issues, breaking away from his predecessor's rigid control, according to a Bloomberg report.
However, Subramanian warned of an inevitable upheaval. “This will unfold in real time amid noise and pain,” he declared.
Although exporters have long called for a weaker rupee to improve competitiveness, the RBI remains cautious. India imports 90% of its crude oil and a weakening rupee directly affects the import bill. Subramanian emphasized that navigating these competitive pressures will be a formidable challenge for the RBI.