Subbarao Urges RBI to Let Rupee Weaken, Focus on Liquidity to Tackle Inflation

Former RBI Governor Duvvuri Subbarao advises the Reserve Bank of India to permit a further decline in the rupee to cope with external challenges and to prioritize liquidity measures over rate hikes if inflation surges. As the Monetary Policy Committee prepares for its upcoming meeting, Subbarao emphasizes strategic communication and liquidity management.

Duvvuri Subbarao, the Reserve Bank of India's former governor, recommends the central bank allow the rupee to weaken further to better handle external pressures. He advocates using liquidity tools as a primary strategy rather than relying on interest rate increases if inflation risks rise.

With the RBI's next policy meeting approaching, Subbarao warns that defending the rupee too rigidly could hinder adjustments needed due to a deteriorating external balance. He asserts that a devalued rupee could serve as an efficient shock absorber in such scenarios.

Subbarao highlights the challenge of managing expectations during exchange-rate strains, noting that perceptions of a weakening rupee can exacerbate its decline. Asserting that timely and composed interventions are crucial, he stresses the importance of robust communication strategies for policymakers.

He suggests that the RBI, amid global geopolitical tensions impacting currency values, should consider pausing interest rate hikes unless inflation proves persistent, opting instead for liquidity measures to maintain growth and stability.

As the Monetary Policy Committee considers its strategy, Subbarao advises caution, balancing the complexities of growth, inflation control, and exchange-rate stability.