From the Opinions Editor Who gets the rupee right: Economists, market wallahs or moralists?
This time is no different. Economists, market wallahs and moralists – all have given their two cents on how the ongoing crisis ought to be tackled. What they have proposed, though, has been largely at odds. That should not be surprising. After all, the advice that is given, as is often the case, depends on where you sit.Economists have, by and large, stuck to orthodoxy — that the central bank should not defend the rupee. It should neither draw down its forex reserves nor should it raise interest rates to defend the currency. An inflation-targeting central bank should focus on inflation, not the exchange rate. The rupee should, instead, be left to find its own level. A weaker currency would, at the very least, help maintain the competitiveness of the country’s exports. It would also make Indian assets such as stocks and bonds cheaper in dollar terms, increasing their attractiveness for foreign investors. Efforts to defend the currency are, in any case, likely to be futile as the rupee’s problems run deep. The energy shock that has exposed India’s vulnerability, the absence of a domestic AI play alongside the rapid global adoption of AI models that threatens India’s growth engine, the possibility of the China+1 dream fading away and the risk-return calculus on domestic investments souring even for Indian firms – all raise deeper questions about the country’s growth prospects. It is these concerns which have prompted a flight of capital and put pressure on the currency that need to be addressed, not the rupee’s decline.
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