Rupee should be allowed to depreciate: Arvind Subramanian
If oil prices rise and other currencies depreciate, the rupee depreciating has to be part of the adjusting mechanism, says outgoing chief economic adviser Arvind Subramanian
New Delhi: The Indian rupee should be allowed to depreciate in sync with currencies of the rest of the world as trade wars may quickly turn into currency wars, India’s outgoing chief economic adviser Arvind Subramanian said, adding that the country can withstand external shocks from high oil prices and a strong dollar.
“If oil prices rise and other currencies depreciate, the rupee depreciating has to be part of the adjusting mechanism,” Subramanian said in an interview on Wednesday. “To say that the rupee should not depreciate when all these shocks are happening is just bad economics.”
Given that unilateral tariff hikes on steel and aluminium by the Donald Trump administration has forced many countries, including India, to retaliate, and the US is showing no signs of backing down, it could soon turn into full-blown trade wars, said Subramanian.
India should opt for a gradual non-disruptive rupee depreciation to tide over the crisis as a “strong dollar could lead to capital outflows from emerging markets”, Subramanian suggested. The rupee has depreciated by 8% this year to breach the 69-mark against the dollar, making it one of the worst-performing currencies among its peers.
“We have a stable macro-policy, growth is coming back and we have foreign exchange reserves to cushion this disruption. There is not a whole lot we can do to change what is happening in the world. But the two things we can do is to allow the adjustment to be gradual and non-disruptive for which we have the capability.”
On the domestic front, Subramanian said “the government is trying hard to maintain fiscal discipline and maintain macro-economic stability”.
The government, he said, has shown courage by sticking to price deregulation of fuels and not doing anything unduly populist, as the impact on growth from rising oil prices and higher interest rates should be 0.1-0.2 percentage point. “We have the political courage to allow these changes to pass through.”
A survey of market participants in Singapore and Mumbai by Moody’s Investors Service released on Wednesday showed that high oil prices were the top risk to India’s economy and that the government’s recapitalization package for banks is insufficient.
Subramanian said the government may need to infuse additional capital into state-run banks this fiscal year. More so, as 19 of the 21 state-run banks reported combined losses of ₹85,370 crore, with total non-performing assets (NPAs) of about ₹9 trillion, wiping out the ₹ 1 trillion capitalization by the government in 2017-18.
“Although we expect the recapitalization package to be sufficient to meet the minimum regulatory capital needs, we think it will be insufficient to support credit growth,” said Subramanian.
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