Let rupee depreciate, use liquidity tools before rate hikes to tackle inflation: Former RBI governor

Former RBI Governor Duvvuri Subbarao has said the Reserve Bank should allow the rupee to depreciate further to absorb external shocks and rely on liquidity management measures, instead of immediate interest rate hikes if inflation pressures intensify, PTI reported.His remarks come days before the Reserve Bank’s Monetary Policy Committee (MPC) meets between June 3 and June 5 to decide on policy rates amid rising crude oil prices and concerns over inflation linked to the ongoing West Asia crisis."The rupee should be allowed to adjust rather than be rigidly defended because the current pressures reflect a deterioration in India's external balance. A weaker rupee acts as a natural shock absorber," Subbarao told PTI in an interview.The rupee has been under pressure due to geopolitical tensions and higher crude oil prices, touching a record low of 97.15 against the US dollar earlier this month.Market data shows the rupee has depreciated around 5 per cent since the start of the West Asia crisis, over 6 per cent since the beginning of 2026 and more than 10 per cent over the past year.Subbarao said exchange-rate management during periods of volatility is largely about maintaining confidence.

"Exchange-rate crises are ultimately crises of confidence. If investors, importers and households begin to believe the rupee will weaken further, they behave in ways that actually make it weaken further," he said."That is why communication becomes as important as intervention. Policymakers must act decisively, but without appearing panicked or defensive," he added.The former RBI governor said the central bank faces a difficult balancing act between growth, inflation and currency stability.According to him, cutting rates further to support growth could worsen inflation and currency pressures, while aggressive rate hikes could hurt economic activity and GDP growth."A pause in interest rate tightening may be appropriate at this stage because the situation is unusually complex, involving a simultaneous balancing of growth, inflation and exchange-rate stability," Subbarao said.He said monetary policy should be used only as a "last resort" to defend the currency."RBI may of course tighten monetary policy if it believes that to be justified by inflation concerns," he said.Subbarao added that if inflation begins to rise sharply, the RBI should first tighten liquidity conditions instead of directly increasing policy rates."In that case, the tightening could first come through liquidity management rather than outright rate hikes," he said.The RBI had kept policy rates unchanged in its April meeting after reducing the repo rate by 1.25 percentage points since last year to support growth. The repo rate currently stands at 5.25 per cent.