'New RBI guv has been dealt an impossible hand...': Arvind Subramanian’s 8-point take on rupee’s future

Former Chief Economic Advisor (CEA) Arvind Subramanian has called India’s current currency dilemma a near-impossible challenge for the new Reserve Bank of India (RBI) Governor, Sanjay Malhotra. 

In a detailed post on X, Subramanian outlined eight key points on why the rupee’s decline is inevitable and the stark choices confronting the central bank.

Subramanian described Malhotra as a “victim” of an unsustainable policy framework and pegged exchange rate inherited from his predecessor, Shaktikanta Das. 

During Das’s tenure, the rupee’s volatility was among the lowest in emerging markets, supported by over $700 billion in forex reserves. However, Subramanian argued, this policy had reached a breaking point.

“RBI’s own calculations suggest large overvaluation,” he noted, adding that the rupee “has to decline a lot more, especially if the US imposes tariffs.”

According to Subramanian, the RBI has only two choices: allow a gradual rupee depreciation or accept a sudden and significant drop. Neither option is painless. A slow decline, he warned, risks intensifying speculative pressures, while a discrete fall could disrupt firms and the broader economy.

The rupee recently hit a record low of 86.7025 against the dollar, driven by foreign outflows totaling $2.7 billion this year, rising oil prices, and a stronger dollar. Malhotra, who assumed office in December, in a Bloomberg report is said to be inclined to allow greater flexibility in daily currency fluctuations to address these concerns, breaking from his predecessor’s rigid controls. 

However, Subramanian warned of unavoidable turbulence. “This will unfold in real time amidst clamor and pain,” he stated.

While exporters have long demanded a weaker rupee to enhance competitiveness, the RBI remains cautious. India imports 90% of its crude oil, and a weaker rupee directly impacts the import bill. Subramanian emphasized that navigating these competing pressures would be a formidable challenge for the RBI.