New Delhi [India], May 22 (ANI): The Reserve Bank of India (RBI) should not let the psychological barrier of Rs 100 per dollar dictate its monetary strategy, and the right approach under current conditions is to allow the domestic currency to weaken, according to Arvind Panagariya, Chairman of the 16th Finance Commission and Former Vice Chairman of NITI Aayog.

In a message to RBI, expressing his views on the social media platform X, Panagariya stated that the central bank needs to look past specific exchange rate milestones when navigating currency fluctuations driven by global supply disruptions.

'Dear @RBI: Do not let the psychology of Rs 100 per dollar determine your policy response. 100 is just a number, like 99 and 101. Whether the oil shortage is short-lived or long-lived, the right response at this moment is to let the rupee depreciate,' Panagariya stated.

The economist outlined how the domestic economy would adjust depending on the duration of the current commodity shock. He noted that if the disruption in oil markets remains temporary, the currency will eventually find its equilibrium as import pressures ease and investment flows return to domestic markets.

'Oil shortage is short-lived (3 mo to a yr): In this case, the rupee will depreciate now but will substantially recover once the oil-import bill shrinks and foreign capital seeks Indian investments precisely to take advantage of the 'cheap' rupee,' Panagariya added.

Conversely, Panagariya warned against deploying foreign exchange reserves or altering interest structures to artificially maintain the value of the rupee if global supply challenges persist over a longer horizon.

'The oil shortage is long-lasting (One to an unknown number of years): A resort to anything other than depreciation will be a losing proposition. Trying to defend the rupee will continue to bleed the reserves until they are exhausted,' he said.

Panagariya further stated that alternative capital-raising options would offer limited relief and fail to prevent an eventual market adjustment.

'Nor would the dollar-denominated bonds or high-interest dollar-denominated NRI deposits turn out to be more than a band-aid. Eventually, you will have to cross the 100-rupee-per-dollar psychological barrier,' Panagariya noted.

Addressing potential macroeconomic concerns, the 16th Finance Commission chief highlighted that the present economic fundamentals of the country are significantly stronger than during previous periods of external vulnerability.

'This is not 2013: Inflation was in the double digits in 2013. Thanks to your prudent monetary management, that is not the case now. Therefore, the economy is well-positioned to absorb some inflationary pressure that will accompany the depreciation,' Panagariya added.

Panagariya also expressed reservations regarding the financial viability of introducing specialised debt instruments targeted at overseas investors to stabilise the exchange rate.

'Dollar-denominated bonds and High-interest NRI Dollar Deposits: These are costly instruments that pay significantly higher interest than the rate India earns on its own foreign-currency reserves. It is largely a transfer to rich NRIs,' he stated.

At the time of filing this report, the rupee stood at 96.19 against the dollar. (ANI)