New RBI Chief Faces Pressure to Free Rupee Amid Rising Dollar

Photo : AFP

India’s new central bank head, Sanjay Malhotra, faces a challenging decision regarding the rupee’s value. His predecessor, Shaktikanta Das, focused on controlling the rupee’s fluctuations, providing stability for both investors and businesses. But his strict control over the rupee has been criticized for reducing India’s export competitiveness, particularly as the economy slows down. 

With Malhotra now in charge, there are expectations he may allow the rupee to float more freely. The rupee's volatility surged in December, reaching its highest in over a year as the dollar strengthened further. Some experts believe that the RBI’s current policy on the rupee needs to be more flexible, especially in light of growing external pressures.

Former Chief Economic Adviser Arvind Subramanian has argued for a more flexible exchange rate, suggesting that the tight control over the rupee has hurt India’s exports. He also warned of potential risks, such as tighter monetary conditions or a currency attack.

The rupee's trade competitiveness reached a record high in November, indicating it may be overvalued by around 8%. Analysts suggest that a small depreciation of 2-3% could bring it in line with economic fundamentals.

The rupee is under pressure as it nears the 86-mark, hitting new record lows recently. The country’s trade deficit is widening, and the flow of foreign direct investment (FDI) has slowed. India’s foreign exchange reserves have also fallen significantly from their September peak, signaling growing challenges. 

Experts are watching closely to see how Malhotra handles this situation. Some banks, like MUFG, have lowered their forecasts, predicting the rupee will drop further. It’s expected that the RBI might allow the rupee to weaken but will not let it fall too far.

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