Economist Montek Singh Ahluwalia says RBI was right to let rupee weaken
Montek Singh Ahluwalia said the RBI was right to let the rupee weaken amid external pressures. He said the move reflected market conditions, could aid exports and highlighted wider reform needs.
Economist and former Planning Commission Deputy Chairman Montek Singh Ahluwalia has backed the Reserve Bank of India’s decision to allow the rupee to weaken amid global pressures, saying the currency should reflect market realities instead of being defended at all costs.
His remarks come at a time when the rupee has faced intense pressure due to rising crude oil prices, foreign investor outflows and uncertainty linked to the Iran conflict.
The rupee had recently fallen close to the Rs 97-per-dollar mark before seeing some recovery in the last few sessions as crude oil prices cooled, and market sentiment improved slightly.
Speaking in an interview, Ahluwalia said the weakening of the rupee was “pretty much unavoidable” given India’s widening external pressures and slowing capital inflows.
“I don’t think, by the way, allowing the rupee to slip was the wrong decision,” Ahluwalia said.
“The whole idea that the currency should reflect market conditions implies that when market conditions turn adverse, you allow the exchange rate to depreciate a bit,” he added.
WHY THE RUPEE CAME UNDER PRESSURE
Rupee has been under heavy pressure over the past few months as the Iran conflict pushed global crude oil prices sharply higher and triggered concerns around inflation and India’s import bill.
India imports nearly 85-90% of its crude oil requirements, making the economy highly sensitive to oil price spikes.
At the same time, foreign portfolio investors have been pulling money out of Indian markets amid rising global uncertainty and higher US bond yields.
According to Ahluwalia, India had for years managed its current account deficit comfortably because of strong capital inflows. But that situation changed over the last two years.
“For a long time, we were running a current account deficit, which was easily managed with the capital inflows we had,” he said.
“Those capital inflows dried up over the last two years or so. So unless you intend to make up the gap by simply running down reserves, which is not a good idea, you would expect that the exchange rate would take a little bit of a hit,” he added.
‘RUPEE DEPRECIATION CAN HELP EXPORTS’
Ahluwalia also argued that a weaker rupee is not entirely negative for the economy.
According to him, currency depreciation can help exports become more competitive globally over the medium term.
“It helps exports in the medium term,” he said while explaining why some adjustment in the exchange rate may actually be necessary during periods of global stress.
His comments come amid a wider debate among economists over whether the RBI should aggressively defend the rupee through rate hikes or heavy dollar intervention.
Several economists and policymakers have recently argued that trying to defend a specific exchange-rate level at all costs may not be sustainable during a major external shock.
MONTEK FLAGS BIGGER STRUCTURAL ISSUES
While supporting the RBI’s broader currency approach, Ahluwalia also pointed to deeper structural concerns facing the Indian economy.
He said weak private investment and sluggish exports have been challenges for several years and are not linked only to the recent oil shock.
“There are some strengths to the economy, but there have also been weaknesses, which we’ve known for some time,” he said.
“Private investment has been low for several years. Exports have not done well for several years,” he added.
According to Ahluwalia, India now needs to send stronger signals to global investors through reforms, trade agreements and clearer policy direction.
CALLS FOR STRONGER TRADE PUSH
The veteran economist said India should deepen its trade integration with Asia, which he described as the most important driver of global trade growth.
He said India should seriously consider joining trade arrangements such as the CPTPP, a major Asia-Pacific trade grouping that does not include China.
“We should signal our determination to make the best use possible of international trade,” he said.
Ahluwalia also raised concerns around investor confidence and investment protection agreements.
He pointed out that India wound up several bilateral investment treaties (BITs) in 2015 and said uncertainty around investment protection frameworks can make foreign investors cautious during difficult economic periods.
RUPEE RECOVERS SLIGHTLY AFTER RECENT FALL
The rupee has shown some recovery in recent sessions after crude oil prices fell below the $100-per-barrel mark and hopes emerged around possible easing of tensions between the US and Iran.
Still, the currency remains under pressure after its sharp fall earlier this month.
Economists say the rupee’s future direction will depend heavily on:
global crude oil prices,movement in foreign investment flows,US interest rates,and geopolitical developments in West Asia.
Economist and former Planning Commission Deputy Chairman Montek Singh Ahluwalia has backed the Reserve Bank of India’s decision to allow the rupee to weaken amid global pressures, saying the currency should reflect market realities instead of being defended at all costs.
His remarks come at a time when the rupee has faced intense pressure due to rising crude oil prices, foreign investor outflows and uncertainty linked to the Iran conflict.
The rupee had recently fallen close to the Rs 97-per-dollar mark before seeing some recovery in the last few sessions as crude oil prices cooled, and market sentiment improved slightly.
Speaking in an interview, Ahluwalia said the weakening of the rupee was “pretty much unavoidable” given India’s widening external pressures and slowing capital inflows.
“I don’t think, by the way, allowing the rupee to slip was the wrong decision,” Ahluwalia said.
“The whole idea that the currency should reflect market conditions implies that when market conditions turn adverse, you allow the exchange rate to depreciate a bit,” he added.
WHY THE RUPEE CAME UNDER PRESSURE
Rupee has been under heavy pressure over the past few months as the Iran conflict pushed global crude oil prices sharply higher and triggered concerns around inflation and India’s import bill.
India imports nearly 85-90% of its crude oil requirements, making the economy highly sensitive to oil price spikes.
At the same time, foreign portfolio investors have been pulling money out of Indian markets amid rising global uncertainty and higher US bond yields.
According to Ahluwalia, India had for years managed its current account deficit comfortably because of strong capital inflows. But that situation changed over the last two years.
“For a long time, we were running a current account deficit, which was easily managed with the capital inflows we had,” he said.
“Those capital inflows dried up over the last two years or so. So unless you intend to make up the gap by simply running down reserves, which is not a good idea, you would expect that the exchange rate would take a little bit of a hit,” he added.
‘RUPEE DEPRECIATION CAN HELP EXPORTS’
Ahluwalia also argued that a weaker rupee is not entirely negative for the economy.
According to him, currency depreciation can help exports become more competitive globally over the medium term.
“It helps exports in the medium term,” he said while explaining why some adjustment in the exchange rate may actually be necessary during periods of global stress.
His comments come amid a wider debate among economists over whether the RBI should aggressively defend the rupee through rate hikes or heavy dollar intervention.
Several economists and policymakers have recently argued that trying to defend a specific exchange-rate level at all costs may not be sustainable during a major external shock.
MONTEK FLAGS BIGGER STRUCTURAL ISSUES
While supporting the RBI’s broader currency approach, Ahluwalia also pointed to deeper structural concerns facing the Indian economy.
He said weak private investment and sluggish exports have been challenges for several years and are not linked only to the recent oil shock.
“There are some strengths to the economy, but there have also been weaknesses, which we’ve known for some time,” he said.
“Private investment has been low for several years. Exports have not done well for several years,” he added.
According to Ahluwalia, India now needs to send stronger signals to global investors through reforms, trade agreements and clearer policy direction.
CALLS FOR STRONGER TRADE PUSH
The veteran economist said India should deepen its trade integration with Asia, which he described as the most important driver of global trade growth.
He said India should seriously consider joining trade arrangements such as the CPTPP, a major Asia-Pacific trade grouping that does not include China.
“We should signal our determination to make the best use possible of international trade,” he said.
Ahluwalia also raised concerns around investor confidence and investment protection agreements.
He pointed out that India wound up several bilateral investment treaties (BITs) in 2015 and said uncertainty around investment protection frameworks can make foreign investors cautious during difficult economic periods.
RUPEE RECOVERS SLIGHTLY AFTER RECENT FALL
The rupee has shown some recovery in recent sessions after crude oil prices fell below the $100-per-barrel mark and hopes emerged around possible easing of tensions between the US and Iran.
Still, the currency remains under pressure after its sharp fall earlier this month.
Economists say the rupee’s future direction will depend heavily on:
global crude oil prices,movement in foreign investment flows,US interest rates,and geopolitical developments in West Asia.
