Industry Odisha Bureau, Oct 19: Former RBI governor D Subbarao says costly short-term measures cannot hold the rupee against fundamentals. Lasting strength, he argues, needs durable foreign capital and predictable tax rules.
Former Reserve Bank of India governor D Subbarao has warned against propping up the rupee. Holding it at a level that defies economic fundamentals will prove futile, he said. He criticised costly short-term measures that leave deeper problems untouched. Subbarao, governor from 2008 to 2013, spoke to The Economic Times in Dubai.
He does not oppose intervention outright. The RBI should let the rupee find its level while managing its path, he said. Fixing a specific rate, he argued, is distortionary, expensive and ultimately reversed by markets. Exchange rates, in his view, reflect market expectations, demand and supply.
His comments follow a sharp slide in the currency. The rupee had neared record lows of 96–97 per dollar. It recovered nearly 2% last week after the RBI moved to curb dollar demand. The measures also targeted speculative bets against the currency.
The package opened a special dollar window for state-run oil marketing companies. These firms are among the largest buyers of dollars, given India’s heavy crude imports. Routing their needs outside the market eases immediate pressure on the rupee. The RBI also introduced a Foreign Exchange Risk Reserve (FERR) and tightened derivative rules.
It also conducted an open market operation (OMO) sale of bonds. Banks now face higher daily cash reserve ratio (CRR) maintenance requirements. Both steps drain rupee liquidity, making it costlier to bet against the currency. Such tightening, however, can raise borrowing costs across the economy.
Subbarao said these macroprudential steps helped the rupee recover somewhat. The bigger question, he said, is why the rupee is falling at all.
He was sceptical of the special Foreign Currency Non-Resident (Bank), or FCNR(B), deposit scheme. It reportedly drew about $133 billion before the window closed on 31 August. Markets know these are borrowed resources, and costly ones, Subbarao said. Such deposits are liabilities that can flow out when they mature. Unlike direct investment, they do not add lasting capital.
Subbarao rejected the view that oil alone explains the rupee’s weakness. Rising oil prices and import bills strain the current account, he acknowledged. But he called that only the proximate cause. The deeper structural issue, he said, is capital outflows. The current account tracks trade and income flows. Capital outflows occur when investors pull money out of Indian assets.
He pointed to concerns about India’s investment climate. International investors complain that India’s regulation is less predictable, he said. They also cite arbitrary interpretation of tax laws, according to Subbarao. Such uncertainty can push long-term capital towards other markets. He argued the rupee will strengthen when India attracts durable, fundamentals-based inflows.
The RBI faces a familiar dilemma. A weaker rupee can stoke imported inflation, while heavy intervention can drain reserves. Smoothing volatility remains a legitimate central-bank role. On Subbarao’s reading, lasting stability depends on fixing the structural issues behind capital outflows.
