Summary of this article
Ex-RBI Governor backs rupee flexibility amid rising external economic pressures
D. Subbarao prefers liquidity tightening over immediate rate hikes
RBI MPC faces inflation, growth and currency stability challenge
Former Reserve Bank of India (RBI) Governor Duvvuri Subbarao has said that RBI should allow the rupee to depreciate further to absorb external pressures instead of immediately resorting to interest rate hikes.
Rupee Pressure Reflects External Challenges
Ahead of the Monetary Policy Committee (MPC) meeting scheduled from June 3-5, 2026, Subbarao said that monetary policy should be used as a “last resort” to defend the exchange rate.
“The rupee should be allowed to adjust rather than be rigidly defended because the current pressures reflect a deterioration in India's external balance. A weaker rupee acts as a natural shock absorber,” Subbarao said in an exclusive interview to PTI.
The rupee has remained under pressure due to geopolitical uncertainty and the ongoing West Asia crisis. Earlier this month, the rupee touched a lifetime low of 97.15 against the dollar.
According to RBI data, the rupee has depreciated around 5 per cent since the start of the West Asia crisis, about 6.10 per cent since the beginning of the year, and over 10 per cent in the last one year.
Subbarao said that stabilising the exchange rate during periods of pressure is largely about managing market expectations. He said fears of further depreciation could trigger actions by importers, exporters and investors that may worsen pressure on the currency.
“That is why communication becomes as important as intervention. Policymakers must act decisively, but without appearing panicked or defensive,” he added.
MPC Faces Balancing Challenge
Subbarao added that RBI has limited room to manoeuvre as it balances growth, inflation and exchange-rate stability.
According to him, lowering interest rates to support growth could aggravate inflation and intensify pressure on the rupee, while aggressive rate increases could hurt economic activity and affect the gross domestic product (GDP) growth.
The upcoming MPC meeting assumes significance as higher international crude oil prices have pushed up domestic fuel prices, adding to inflation concerns. At the previous policy review in April, the MPC had unanimously decided to maintain the status quo on the policy rate.
RBI has reduced the repo rate by 1.25 per cent since last year to support growth amid easing inflation. The benchmark repo rate currently stands at 5.25 per cent.
Liquidity Tightening May Come First
Subbarao added that the preferable approach for RBI, at this stage, would be to wait and assess whether inflationary pressures become broader through the system before considering policy rate hikes.
“A pause in interest rate tightening may be appropriate at this stage because the situation is unusually complex, involving a simultaneous balancing of growth, inflation and exchange-rate stability,” he said, adding that if inflation starts to harden meaningfully, RBI could first tighten liquidity conditions instead of opting for outright repo rate hikes.
