Let the ₹ depreciate; economy well positioned to absorb shocks: Arvind Panagariya

Economist and Chairman of the Sixteenth Finance Commission Arvind Panagariya today said the Reserve Bank of India should allow Rupee to depreciate and the psychological barrier of ₹100 per Dollar should not invoke a policy response.

Panagariya said India is well positioned to absorb external shocks, compared with 2013. 

"Dear @RBI: Do not let the psychology of ₹100 per dollar determine your policy response. 100 is just a number, like 99 and 101. Whether the oil shortage is short-lived or long-lived, the right response at this moment is to let the rupee depreciate," Panagariya said in a post on X.

The point Panagariya essentially made is attempts to defend the currency will deplete the foreign exchange reserves and suggests strategies in the scenarios of oil shortage being both short lived and long lived. 

"Oil Shortage is short-lived (3 months to a year): In this case, the rupee will depreciate now but will substantially recover once the oil-import bill shrinks and foreign capital seeks Indian investments precisely to take advantage of the “cheap” rupee," Panagariya added. 

"The oil shortage is long-lasting (One to an unknown number of years): A resort to anything other than depreciation will be a losing proposition. Trying to defend the rupee will continue to bleed the reserves until they are exhausted," he said. 

He said other measures like dollar denominated bonds too won't work. 

"Nor would the dollar-denominated bonds or high-interest dollar-denominated NRI deposits turn out to be more than a band-aid. Eventually, you will have to cross the 100-rupee-per-dollar psychological barrier," he said in the post. 

Stressing that the situation is far better than 2013, Panagariya said, "Inflation was in the double digits in 2013. Thanks to your prudent monetary management, that is not the case now. Therefore, the economy is well-positioned to absorb some inflationary pressure that will accompany the depreciation."

On Dollar-denominated bonds and high-interest NRI Dollar Deposits, he said these are costly instruments that pay significantly higher interest than the rate India earns on its own foreign-currency reserves. "It is largely a transfer to rich NRIs," he said in the post.