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Informist, Thursday, May 21, 2026

 

NEW DELHI – The Reserve Bank of India must not let the rupee's psychologically crucial level of 100 per dollar determine its policy response, Chairman of the 16th Finance Commission Arvind Panagariya said Thursday. Irrespective of the duration of the oil shortage, the right response at this moment is to let the rupee depreciate, according to Panagariya.

 

"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," he said in a series of posts on X, formerly Twitter. 

 

His comments come amid a weakening rupee, which has depreciated 6% against the dollar since the war in West Asia began on Feb. 28. The rupee depreciated to a record low of 96.96 against the dollar on Wednesday, marking a fall of about 12% on-year, driven by concerns about widening current account deficit and persistently high energy import costs due to the war. 

 

India is facing a severe energy crisis, as it has been exposed to energy supply and price shocks due to its dependence on countries in the Persian Gulf region for oil and gas. Crude oil prices have soared by around 60% following the closure of the Strait of Hormuz since early March. Nearly half of India's crude and natural gas imports pass through this crucial waterway. 

 

According to Panagariya, if the oil shortage is short-lived – for three months to a year – 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.

 

Foreign portfolio investors have been net sellers of Indian equity and debt for some time, exerting pressure on India's foreign exchange reserves. So far in 2026, FPIs have pulled out $21.76 billion from Indian markets, almost double the $10.92 billion they pulled out in 2025.

 

The second scenario – one where the oil shortage is long-lasting, spanning over an unknown number of years – "a resort to anything other than depreciation will be a losing proposition," he said. "Trying to defend the rupee will continue to bleed the reserves until they are exhausted."

 

The central bank has already aggressively intervened in the market to limit the rupee's fall. India's foreign exchange reserves were at $690.69 billion as of May 1, nearly $38 billion below the record high set just before the war started. 

 

Earlier in the day, reports said the central bank is considering various options, including hiking interest rates, raising dollars overseas through deposit schemes for non-resident Indians, and selling sovereign dollar bonds, to limit the rupee's fall. Panagariya advocated against the latter two, saying that neither dollar-denominated bonds nor high-interest dollar-denominated NRI deposits are more than a band-aid.

 

"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," the economist said. "Eventually, you will have to cross the 100-rupee-per-dollar psychological barrier."

 

Panagariya said that, courtesy the RBI's "prudent monetary management", inflation is not in double digits now, making the economy "well-positioned to absorb some inflationary pressure that will accompany the depreciation."   End

 

US$1 = INR 96.20

 

Reported by Priyasmita Dutta

Edited by Saji George Titus

 

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