Arvind Subramanian thinks rupee should be allowed to depreciate. Here’s why

Arvind Subramanian

India’s outgoing chief economic advisor Arvind Subramanian said in a recent interview that the Indian rupee should be allowed to depreciate in sync with currencies of the world, as the ongoing trade war may change into currency wars.

Subramanian said the country can handle shocks from external factors like 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. To say that the rupee should not depreciate when all these shocks are happening is just bad economics,” he said.

Many countries, including India, have had to retaliate against the unilateral tariffs the US has imposed, but Donald Trump is showing no signs of backing down. Subramanian said it could soon turn into a full-blown trade war.

He suggested that India should choose a gradual, non-disruptive rupee depreciation to tide over the crisis, as “a strong dollar could lead to capital outflows from emerging markets”.

The rupee breached the 69-mark against the dollar last month and depreciated by 8 percent this year, making it one of the worst performing currencies.

“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.”

Subramanian also said the current government is trying to maintain fiscal discipline and maintain a macroeconomic stability. He thinks the government has been wise in sticking to price deregulation of fuels and has not done anything “unduly populist”. He thinks India has the political courage to let these changes pass through.

The government may need to infuse capital into state-run banks this fiscal, as 19 of the 21 banks reported combined losses of Rs 85,370 crore, according to the outgoing CEA. The total NPAs are worth about Rs 9 trillion.

“Although we expect the recapitalization package to be sufficient to meet the minimum regulatory capital needs, we think it will be sufficient to support credit growth,” Subramanian said.