No need to prevent rupee from falling:PM Adviser says ‘Let market decide currency level, India should focus on Inflation

Prime Minister’s Economic Advisory Council member Sanjeev Sanyal said that India should not try to stop the rupee from falling. Instead, it should let the market determine its level. Meanwhile, our main focus should be on keeping the inflation rate under control. Sanyal said that when the country adopted the inflation targeting framework, it chose monetary policy over currency exchange rate. 1. Controlling inflation is the primary goal Sanjeev Sanyal explained that policy makers face several challenges in economies with open capital accounts. India’s framework is based on the principle that no country can simultaneously run an independent monetary policy and strictly control its currency’s exchange rate. For a large and internally strong country like India, targeting the inflation rate instead of fixing the rupee’s rate is the right step. 2. Success of the inflation targeting framework Sanyal emphasized that India should not intervene in the rupee level. He said that the inflation targeting system has worked very well in the country. There was a time when the inflation rate in India used to remain in the range of 8% to 12%, whereas in the last decade it has successfully come down to the range of 2% to 6%. 3. Proper use of foreign exchange reserves Sanjeev Sanyal also said that leaving the rupee to the market does not mean at all that the central bank or concerned authorities will sit completely silent. He said that forex reserves can be used to slow down the pace of sudden or sharp fluctuations in currency and to handle shocks, but it should not be used to prevent the rupee from reaching its natural level. 4. Weak Rupee Benefits Exporters Sanyal explained that a weakening rupee is not always harmful to the economy. He said that if the inflation rate in the country remains controlled, then a fall in the rupee gives Indian exporters a competitive advantage in the international market. The currencies of many countries in the world experience significant fluctuations, so if prices are stable domestically, then a weak rupee does not become an obstacle for the economy. 5. India’s Approach is Different from China According to Sanyal, the main concern should be whether the decline in currency is increasing inflation within the country. If inflation is under control and interest rates can be raised when needed, then forcibly protecting the rupee is not the right approach. He also said that India’s step is not like China deliberately weakening its currency, but rather the Indian rupee’s movement is completely natural and organic. In the long term, Purchasing Power Parity (PPP) will play its role. What is Inflation Targeting Framework? It is a monetary policy framework under which the country’s central bank like RBI aims to maintain the inflation rate within a fixed range (2% to 6%), so that price stability is maintained. What is Purchasing Power Parity (PPP)? Purchasing Power Parity, meaning purchasing power equivalence, is an economic measure to compare the purchasing capacity of currencies of two different countries.