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Amid a steep fall in rupee, Principal Economic Adviser Sanjeev Sanyal Friday said that the RBI has enough firework to deal with the situation and that there is no need to hike interest rate to halt the depreciation.
While noting that the RBI is watching the situation on a continuous basis, he said the Indian economy is on a strong footing with forex reserves of $400 billion.
"We do have a lot of reserves this time around. We have about $400 billion. Inflation and other constraints are not there on the macroeconomic side. So, consequently, we are in a position to allow the rupee to depreciate," Sanyal said here.
He also observed that many of the emerging nations have allowed their currencies to depreciate in response to a trade war.
"So the question (should) is we jack up interest rates suddenly to stall this. My view would be it is unnecessary at this point in time," he said.
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According to him, it is unnecessary because so far as interest rates are concerned, the Monetary Policy Committee's first mandate is to control inflation. and that inflation remains well behaved.
"So, we don't want to interfere with that... Other currencies are also depreciating. So yes if it goes too far too soon, we will see some strong intervention for which we have incidentally kept our powders dry," Sanyal said.
He also said that the way to do it is to let the rupee go way past where it makes sense and then blow it.
"I don't believe in the idea of an equilibrium. So there is no such thing as fair value of the rupee, " he added.
The rupee has slumped around 6 per cent since August and touched an all-time low of 72 level this week.
With regard to various reforms undertaken by the government, Sanyal said the introduction of GST and the Insolvency and Bankruptcy Code are very important.
"We needed to change the banking culture of the country and have some sort of bankruptcy and insolvency process. This was a very important part," he said.
Going forward, Sanyal said two things "we would love to do" is to clean up legal system not just judiciary but the wider legal system as well as have administrative reforms.
