Key Points
- Michael Debabrata Patra says currency movements can overshoot, risking financial stability.
- IMF urges India to let the rupee absorb external shocks rather than rely heavily on foreign-exchange intervention.
- Former RBI governor Duvvuri Subbarao has also called for less intervention, letting market forces determine the currency’s value.
ISLAMABAD: Former deputy governor of the Reserve Bank of India (RBI) Michael Debabrata Patra has warned that using the rupee as an automatic stabiliser during global economic disruptions can hurt India’s real economy.
India’s artificial monetary stability is intensifying debate over whether the central bank should defend the currency or let market forces influence it.
Patra’s comments follow rising oil prices and heavy foreign investor selling, which put pressure on the Indian currency, which approached 97 rupees per US dollar earlier this month.
The rupee has recovered about 2 per cent following recent RBI measures, including allowing oil companies to access dollars from its reserves and imposing reserve requirements on large foreign-exchange hedging transactions.
Patra, who oversaw monetary policy as deputy governor from 2020 to 2025, cautioned that floating exchange rates do not necessarily adjust smoothly to external shocks.
“Since the advent of floating exchange rates, the experience has been quite the opposite of the exchange rate acting as an automatic stabiliser,” he wrote in an emailed interview.
He said currency markets could experience overshooting, self-fulfilling expectations and bandwagon effects, in which investors reinforce an existing market trend.
Such movements can push exchange rates beyond levels justified by underlying economic conditions and introduce risks to financial stability.
Patra said the rupee’s performance should be assessed over time rather than through short-term movements.
Greater currency flexibility
Patra’s remarks followed a call by the International Monetary Fund (IMF) for India to allow the exchange rate to serve as the first line of defence against the ongoing oil shock.
Krishna Srinivasan, director of the IMF’s Asia and Pacific Department, said earlier on Wednesday that countries should allow their currencies to adjust when global disruptions affect trade, capital flows and domestic economic conditions.
“Our advice to countries is to use the exchange rate as the first line of defence amid ongoing shocks,” Srinivasan said at a media briefing in Mumbai. “We would advise India to let the exchange rate move.”
He argued that foreign-exchange intervention delivered no substantial benefits beyond the short term in the face of the oil shock, and that currencies needed to absorb some of the pressure generated by changing global conditions.
India is particularly exposed to rising oil prices because it imports much of the crude oil it consumes. More expensive oil increases the country’s import bill and demand for dollars, putting additional pressure on the rupee.
Allowing the currency to depreciate can help reflect that external cost, although it also makes imported energy and other dollar-priced goods more expensive in local currency terms.
The IMF’s position does not rule out intervention in all circumstances. It distinguishes between allowing a currency to adjust to economic fundamentals and using policy measures to address disorderly market conditions or excessive volatility.
Former RBI governor also questions intervention
Former RBI governor Duvvuri Subbarao has expressed similar concerns about prolonged intervention to support the rupee.
In an earlier interview with The Indian Express, Subbarao argued that the central bank should intervene minimally in the foreign-exchange market and allow gradual depreciation rather than expend resources defending a particular exchange-rate level.
He warned that a 5 per cent depreciation could add roughly 40 basis points to inflation while reducing growth by about 25 basis points, illustrating the difficult trade-off facing policymakers. A basis point is one-hundredth of a percentage point.
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Subbarao also noted that uncertainty over input costs and demand could cause businesses to postpone investment decisions, even if they did not cancel planned projects outright.
His argument highlights the competing risks confronting the RBI: excessive currency weakness can fuel imported inflation. Meanwhile, attempts to restrain depreciation can delay necessary economic adjustment and leave businesses facing uncertainty over the rupee’s underlying value.
Growth and inflation trade-off
The debate comes as India’s monetary policymakers balance currency pressures against domestic growth. The RBI’s monetary policy committee raised its benchmark repo rate by 25 basis points at its latest meeting and shifted its stance from “neutral” to “calibrated tightening”.
However, the meeting minutes also reflected caution among policymakers about tightening monetary policy too aggressively and inhibiting economic growth.
Patra said effective communication could help policymakers cushion the effects of global disruptions by shaping market expectations. Clear explanations of policy objectives could reduce uncertainty without requiring the central bank to defend a particular exchange-rate level.
The central issue is therefore not whether the RBI should abandon the rupee during periods of stress, but how far it should go to limit depreciation. Intervention can help contain abrupt market movements, but prolonged efforts to suppress adjustment may carry costs for reserves, financial stability and economic activity.
For India, the challenge is to prevent disorderly currency movements without insulating the economy from the price signals generated by higher oil costs and changes in global capital flows.
