‘The new RBI government has been dealt an impossible hand…’: Arvind Subramanian’s 8-point take on the future of the rupee

Former Chief Economic Advisor (CEA) Arvind Subramanian has described India’s current currency dilemma as an almost impossible challenge for the new Reserve Bank of India (RBI) Governor, Sanjay Malhotra.

In a detailed post on X, Subramanian outlined eight key points on why the rupee’s decline is inevitable and the difficult choices facing the central bank.

Subramanian described Malhotra as a “victim” of the unsustainable policy framework and pegged exchange rate inherited from his predecessor Shaktikanta Das.

During Das’ tenure, rupee volatility was among the lowest in emerging markets, supported by more than $700 billion in foreign exchange reserves. However, Subramanian believes that this policy has reached a breaking point.

“The Reserve Bank of India’s calculations indicate a significant overvaluation of the rupee,” he noted, adding that the rupee “must fall much further, especially if the United States imposes tariffs.”

According to Subramanian, the Reserve Bank of India has only two options: either allow a gradual decline in the value of the rupee or accept a sudden and significant decline. Neither option is painless. He warned that a slow decline risks intensifying speculative pressures, while a separate decline could disrupt companies and the broader economy.

The rupee recently hit a record low of 86.7025 against the dollar, driven by foreign inflows totaling $2.7 billion this year, rising oil prices, and a strong dollar. Malhotra, who took office in December, is said to be leaning towards allowing greater flexibility in daily currency fluctuations to address these concerns, breaking with the strict controls imposed by his predecessor.

However, Subramanian warned of inevitable disruptions. “This will happen in real time, amid the noise and pain,” he said.

While exporters have long demanded a weaker rupee to boost competitiveness, the Reserve Bank of India remains cautious. India imports 90% of its crude oil needs, and a weak rupee directly impacts the import bill. Navigating these competing pressures will pose a huge challenge for the RBI, Subramanian stressed.