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Mumbai.Rupee need not be defended as market should decide its level, PM economic adviser says

Prime Minister’s Economic Advisory Council member Sanjeev Sanyal has argued that India should not try to prevent the rupee from weakening, but instead allow market forces to determine its level. He said the government’s main focus should remain on keeping inflation under control, rather than defending a particular exchange rate.

Sanyal said India had consciously chosen monetary policy focused on inflation when it adopted the inflation-targeting framework, rather than making the currency exchange rate the primary policy objective. In an economy with an open capital account, policymakers face several competing demands, making it difficult to pursue an independent monetary policy while tightly managing the currency.

Inflation control remains the policy priority

Sanyal said the framework rests on the principle that a country cannot simultaneously have an independent monetary policy and tightly control its exchange rate. For a large and internally strong economy such as India, targeting inflation is therefore a more appropriate approach than trying to fix the rupee at a particular level.

He stressed that the inflation-targeting system has worked well for India. There was a time when inflation remained in the 8%-12% range, while over the past decade it has been brought down successfully to around 2%-6%.

Forex reserves should cushion sharp market shocks

Allowing the rupee to find its market-determined level does not mean the Reserve Bank of India or other authorities should remain passive. Sanyal said foreign exchange reserves can still be used when the currency faces sudden or excessive volatility.

The key distinction, he said, is that reserves should be used to manage abrupt movements and absorb shocks, rather than to stop the rupee from reaching what the market considers its natural level.

• Forex reserves can help slow sudden currency movements.
• They can also be used to absorb external shocks.
• But they should not be used to permanently defend an exchange-rate level.

Weaker rupee can support exporters if inflation stays low

Sanyal said a weaker rupee is not necessarily harmful to the economy. If domestic inflation remains under control, a decline in the currency can give Indian exporters a competitive advantage in international markets.

Currencies across the world regularly experience significant fluctuations. Therefore, if prices remain stable at home, a weaker rupee need not become an obstacle for the wider economy.

India’s approach differs from deliberate currency weakening

The central question, according to Sanyal, should be whether the rupee’s decline is feeding into domestic inflation. If inflation remains under control and interest rates can be raised when necessary, there is little merit in forcibly protecting the currency.

He also drew a distinction between India and China. India’s approach, he said, is not about deliberately weakening its currency like China, but reflects an organic and market-driven movement of the rupee. Over the longer term, purchasing power parity, or PPP, will play its role.

What inflation targeting and PPP mean

Inflation targeting is a monetary policy framework under which a central bank such as the RBI seeks to keep inflation within a specified range — 2%-6% in India — to maintain price stability.

Purchasing power parity is an economic measure used to compare the purchasing power of currencies in different countries. In simple terms, it helps assess how much goods and services can be bought with different currencies and how their relative value may adjust over time.

• Inflation targeting prioritises price stability.
• PPP compares the purchasing power of different currencies.
• For India, Sanyal’s argument is that stable domestic prices matter more than defending a fixed rupee level.