RBI urged to let rupee slip past ₹100/$ – Finance Commission chief warns against defending the currency

Overview On 21 May 2026 , Sixteenth Finance Commission Chairman Arvind Panagariya posted a warning to the RBI . He asked the central bank not to let the “psychology of ₹100 per dollar” dictate policy and to allow the rupee to depreciate. Key Developments The rupee touched nearly ₹97 per dollar in intraday trading on 21 May 2026, prompting speculation of RBI intervention. Panagariya argues that a short‑term oil shortage will cause a temporary dip, but the rupee will recover once the import bill shrinks. If the shortage persists for more than a year, defending the rupee would “bleed the reserves” and be a losing strategy. He cautions against relying on dollar‑denominated bonds or high‑interest NRI deposits as a band‑aid, labeling them costly and a transfer of wealth to wealthy NRIs. Panagariya notes that India’s inflation is under control, unlike 2013, and the economy can absorb some inflationary pressure from a weaker currency. Important Facts The RBI’s primary tool for managing the foreign exchange reserves is market intervention. Allowing the rupee to fall beyond the ₹100/$ mark would increase the cost of imports, especially oil, but could also make Indian assets cheaper for foreign investors, potentially attracting capital inflows. Higher inflation is expected as a side‑effect of depreciation, yet Panagariya argues that the current macro environment can tolerate modest price pressures. UPSC Relevance Understanding the RBI’s exchange‑rate policy is essential for GS‑III (Economy) questions on monetary policy, balance of payments, and external sector management. The role of the Finance Commission in fiscal federalism also links to GS‑II (Polity). The discussion of oil import bills, foreign reserves, and capital flows ties into topics of trade‑off between exchange‑rate stability and reserve adequacy. Way Forward Panagariya suggests a calibrated depreciation to let the rupee cross the psychological ₹100/$ barrier, while monitoring inflation and reserve levels. He advises against short‑term fixes like issuing dollar‑denominated bonds or offering high‑interest NRI deposits , as these are costly and benefit a narrow segment of investors. In summary, the RBI is urged to adopt a market‑driven approach, allowing the rupee to adjust, while ensuring that inflation remains within target and reserves are not exhausted.