Let rupee act as shock absorber, no case for aggressive RBI defence: Gita Gopinath

India should allow the rupee to respond to economic fundamentals rather than defend it aggressively, according to Gita Gopinath, former chief economist at the IMF and professor at Harvard University.

Speaking to CNBC-TV18, Gopinath said exchange rates should be allowed to absorb shocks, particularly during periods of global uncertainty and external stress.

Her remarks come at a time when India faces pressure from higher oil prices and volatility linked to tensions in West Asia, raising questions over whether policymakers should use interest rates or direct intervention to support the rupee.

Gopinath said she supports flexible exchange rates but recognises that disorderly market conditions may occasionally justify limited intervention.

“I’m actually somebody who believes in flexible exchange rates,” she said, while adding that policymakers must remain alert to sudden and volatile currency moves.

She referred to work done during her time at the IMF on the integrated policy framework, which guides countries on when intervention may be useful.

“There are times when intervention is helpful, when you see disorderly market conditions,” Gopinath said.

However, she drew a distinction between preventing market dysfunction and trying to keep a currency fixed in the face of broader economic shocks.

“My basic point is that there is no argument for a wholesale approach to keeping the rupee unchanged and unmoving at this moment,” she said.

According to Gopinath, the current pressures on the rupee are linked to fundamental developments rather than temporary market dislocation.

She warned that artificially supporting the currency could eventually discourage investors if they believe depreciation is unavoidable.

“If you artificially prop the currency up, then actually it can be self-defeating,” she said.

Instead, she argued that the exchange rate should be allowed to perform its natural stabilising role.

“Letting the exchange rate play its role as a shock absorber is helpful,” Gopinath said.

She also rejected the idea that the Reserve Bank of India should raise interest rates solely to defend the currency.

Some emerging economies, including Indonesia, have used higher interest rates to support exchange rates during periods of stress. But Gopinath said India’s current circumstances do not warrant such action.

“At this moment, I don't think there's a reason to raise interest rates to protect the exchange rate,” she said.

She argued that higher borrowing costs could further weaken economic activity at a time when external shocks are already weighing on production and demand.

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“I don't think there's an argument for the RBI to raise interest rates right now, because that would slow the economy even further,” Gopinath said.

The RBI, she said, should remain patient and monitor incoming data rather than react prematurely.

She added that policy tightening should be considered only if inflation risks intensify significantly or inflation expectations become unanchored.

“As of now,” Gopinath said, “the RBI can very much wait and see over time.”