Gita Gopinath Speaks On Indian Economy & Falling Rupee Amid West Asia Conflict | Rajdeep Sardesai

Added: 2026-05-21

[00:00:02][music] So as multiple challenges stare at the Indian economy and the Modi government, joining me now is a special guest joined by Gita Gopinad, former managing director of IMF and a professor now at Harvard University. Appreciate you joining us. Uh, Professor Gopinat, you and I were in conversation exactly a month ago and your concern was if this war goes into uh, end May, June, that's when its economic consequences will get very serious and that's exactly what seems to be happening at the moment. How do you see the situation now as we enter the end of May with no clear end to the West Asia conflict and indeed what's happening at the straight of Hormos and the blockade there.

[00:00:51]Hi Rajep, indeed this global supply shock of oil and also LPG and LNG you know fertilizers all of this is is just increasing in scale >> and while countries have relied on their reserves to help them during these times and you've seen for example China has really cut back on its imports of oil but similarly Korea and Japan have also done so it's becoming a bigger strain for countries around the world and we certainly see that in India which is being hit also because it relies a lot on the Middle East for its fuel. Uh and this is very consequential. So it's not just about the prices but it's about the shortages. I actually now worry that this is this is this continues into June and the estimates are that it's going to take a lot more destruction in demand if prices have to stay at the $110 a barrel that we have right now. It's very likely that we're looking just given the projected path of supply versus demand that we're looking especially in June at closer to $140 a barrel of oil as opposed to where it is now. Uh so you know every because of this important tipping point that's coming that is likely to happen in June. I think just everybody just expects that uh the US administration is going to figure out a way to open up the trade. But this is not going to happen overnight. It's going to take two to three months even if today everybody decides that they're opening up.

[00:02:28]>> So effectively in this country we've had two fuel price hikes domestic fuel in the last week alone in 5 days. Given that the fears are the worst case scenario that oil goes from $110 a barrel to $140 uh a barrel. Would one presume that India is in for more fuel hikes that this is something inevitable the government cannot avoid?

[00:02:52]>> Yeah, I we you know what we have to recognize that is that this is unfortunately an external shock that has hit India that India has little control over and that is unfortunately creating hardships for house households for businesses. I mean this calls for an adjustment and so while you can have adjustment through voluntary restraint which is what the prime minister has called for in multiple forms but it's also going to work have to work through prices and so yes having fuel prices go up at the pump will be will deliver the behavioral change that you need in terms of cutting back on use of uh that kind of fuel. So it is going to be difficult, even more difficult if it goes up to $140 a barrel.

[00:03:45]>> The pain will have to be shared by the government having a slightly higher fiscal deficit while at the same time some part of the price increase is passed through to households and companies. I mean it's going to be shared in that in that form.

[00:04:00]>> We're already seeing inflation creeping up if you look at wholesale and consumer price index March and April. So you expect that to continue as well. So we are entering a a phase where inflation will keep creeping up. Uh growth presumably will slow down. Uh so the challenges are at a multiple level. Is there a priority that you believe the government needs to address at the moment?

[00:04:22]So first and foremost I think just is just recognizing which I think the prime minister has done by going out and saying that this is a negative shock out of our control and it requires adjustment. It will take a reduction in demand of these imported uh goods you know including the other aspects including gold and so on and it will require lower consumption. It is going to slow down activity. It is going to negatively affect businesses. But again we should just you know so keep in mind the fact that there are many other things that are going well in the Indian economy. You know the economy came into this place with relatively strong consumption demand and public spending and infrastructure was also helping. So there are positive stories to it. India has about $700 billion in reserves. So there are aspects of resilience that come from the you know what India has in terms of its economic strength in terms of its macroeconomic frameworks but it will take adjustment and it will take both the government temporarily running higher fiscal deficit so that it can absorb some of the shock and because it's not going to be able to pass the full cost over through to uh households.

[00:05:36]Maybe some help for businesses that are in in dire straits, especially small businesses who have liquidity problems.

[00:05:44]You can help them with that. Again, you have to do it in a limited way because we still have the prospect of oil going up to a much higher level. I mean, that has not been ruled out yet. So, you have to move carefully. You have to trade carefully. And yes, it will result in somewhat higher inflation.

[00:06:01]producer price inflation is going to go up even further just given what's happening with energy prices. The important inflation that really does matter is consumer price inflation. That is reflecting also the fact that policy is not allowing prices to rise as much.

[00:06:17]But you know again because India starts off with a a good inflation print before this war has happened it has space for inflation to move up without having to you know worry about how damaging that could be for inflation more generally going forward into the future.

[00:06:34]>> Let's come to specifics. India's currency has weakened from around 91 rupees per US dollar at the end of February 2026. It's almost 97 now the highest ever. You've done an oped where interestingly you seem to suggest that a falling exchange rate can curb imports more effectively than austerity measures. So don't intervene in the forex uh market. India has close to $700 billion in foreign exchange. They will not run out because of higher imports and the current condition therefore provide sufficient grounds to consider allowing the rupee to adjust without actively depleting reserves. So we could be seeing the rupee crossing the century mark and you're not too worried.

[00:07:18]I think what we need to pay attention to is what is the adjustment that's required, right? What policy makers should care about is what's happening with jobs in the country, what's happening with inflation in the country, consumer price inflation in the country, with what's happening with output. Those are the variables you care about. Now, the exchange rate is one factor that goes into each of these variables. And so you pay attention to exchange rate because you want to see what's going to happen to the variables you truly care about, right? Which is jobs and inflation and output. So what happens when the currency depreciates? When the currency depreciates, it helps you with the adjustment that you need, which is you cut back on imports, and that is usually very quick. And you see that in the data. When it comes to exports, the quantity of exports don't go up as quickly. I mean, this is what we see in research. you don't see you get you don't get a bang for the buck immediately but at the same time the profit of exporting firms go up and we've seen that over time you can see an increase in exports and importantly the price of the exchange rate is not just determined by imports and exports but it's determined in financial markets so a lot depends upon how foreign investors are looking at uh their returns from putting their money in India and so again let if the exchange 00 was to depreciate. There is a natural point where you say, well, this is now not going to depreciate anymore. You come in, capital flows come in and the currency appreciates. So you get the adjustment that you need. Now to the question of the variables you care about, right? So let's talk about inflation because that's where you see directly showing up. You want you do want some higher inflation because that's precisely the mechanism through which you get the adjustment. As a central banker, what you worry about is if you just end up with unanchoring inflation expectations and people just assume inflation is going to be very far from the RBI's target. There is nothing in the data right now that points to that that says that that kind of unanch anchoring is happening and so therefore that should give some that should give comfort. The other thing you care about is whether this currency movement the rupee getting to 100 is going to generate financial instability. There is nothing in terms of financial institutions in India that point to the fact that okay well if this this will generate financial risks you're not seeing it any any kind of market pricing so therefore I think this is a moment to say okay we need the adjustment this is how the adjustment happens and of course in the event that you actually do have disruptive financial conditions or you see you're getting close to disruptive financial conditions and there are data points you can stare at to make sure what that moment is you can use your scarce resources because you have to keep in mind that the foreign exchange reserves that the RBI has is only that much 700 billion you can't print it you can run out of it and so it's important to be prudent and cautious >> no so is there a red flag on on exchange rates that you would put is there a number you would put as a red flag that that's when we should really get worried >> I would not put a number no that the relevant number is not the actual value of the exchange rate what matters is looking at you know uh certain kinds of yields in financial markets you the currency bases interest parity rates I mean those are the kinds of variables you want to stare at to see whether you're seeing what looks like disorderly financial conditions the problem with intervening right now when this is a fundamental shock which is you have a oil prices going up it is not a problem that India created it is a problem that India has to now deal it when you have that kind of a shock and it's a fundamental shock.

[00:11:07]It requires adjustment. If you try to intervene, all that happens is you lose your res [clears throat] reserves and you for for a tiny amount of time you maybe are able to prop up the currency but then that just you just lose it and you're back to where you would have been without the intervention.

[00:11:23]>> So let me push you one more time. Uh you know if geopolitical center tensions continue for 3 4 months will we see the rupee breach the psychological barrier of $100? It's already the worst performing currency in Asia. Should that not worry us? I ask you this again.

[00:11:38]That's not the priority you're saying.

[00:11:39]Am I correct?

[00:11:40]>> I think firstly it should not be a psychological barrier. There is in a sense we there's no it's not like you want the rupee to be at a particular level for its own sake. You want it to be where at a level that's consistent with job creation with inflation being well contained with output being you know business is not under tremendous stress. Those are the that's what you care about and there is a tradeoff. You will have some more inflation but that's again part of the adjustment mechanism that's required.

[00:12:12]You have to pay attention to problematic situations like financial conditions being disrupted which of course then will affect jobs and will affect output.

[00:12:20]>> Those are the things you worry about not not just the the you know the sticker number for what the rupee is. Um and and so at the moment it's about adjustment.

[00:12:31]>> You know there are those who are of course saying uh Gita Gopinat that uh the the challenge for the government now is not just to sort of ask people to be austere to save more. The prime minister says don't buy gold reduce foreign travel reduce fuel consumption.

[00:12:48]That's those are sermons from the mount.

[00:12:50]What about people particularly at the margins? those whose jobs, livelihoods, stagnant incomes are probably going to take a hit. Are there solutions out there? Is there an example from across the world that you can pick up that maybe India can look at?

[00:13:06]>> Well, there are certainly uh things that can be done and should be done which is including when it comes to fuel prices as and when the government starts passing through more of the world price into the prices that retail at retail level. you will require to provide more you know cash transfers to vulnerable households. You could even cover some fraction of middle-income households frankly. So you have uh uh you know you want to provide cash transfers. That's one way you do it. There are going to be small businesses that are being affected by the higher cost of their inputs.

[00:13:43]These are businesses that you if you determine that they are these are otherwise viable businesses and it's just about the current shock that they're facing right now then providing them with liquidity either through you know a you know government guaranteed loan that's a kind of a measure that you can take to prevent otherwise too many small businesses from shutting down. That's that's a useful step to take. So fiscal deficits will go up more than was projected before. But these are the kinds of adjustments uh that will help.

[00:14:15]>> You know just a couple of days ago I had someone who was India's executive director at the IMF till not too long ago Dr. Surjit Bala who said the economic situation couldn't be worse. He said foreigners are not investing in India. Domestic investors don't want to invest in India. He spoke about FI outflows. He spoke about declining FDI.

[00:14:34]He spoke about the in general a climate which was feel bad. Do you go along with that? Do you believe it's as dire as that for India at the moment or because only 6 months ago many were speaking about this being India's Goldilocks moment.

[00:14:52]>> I I do not agree with that. I think the Indian economy has many areas of strength.

[00:14:59]uh again we have to keep you know keep make it clear about what are the different forms of shocks there is what's happening it with the west Asia conflict it's an external shock not something India created when it comes to capital flows what we also have to take into account is the fact that because inflation in the US is now going to be higher for longer interest rates in the US are going to be higher for longer which means that from a foreign investor's perspective it is going to be more attractive to keep money in the US as as opposed to sending it outside.

[00:15:33]What is true about India is that even before this crisis hit, there was a drying up of uh portfolio inflows into India and not enough porn and direct investment coming into India and there are multiple factors for that. One is India stock markets has always been viewed as being somewhat overpriced.

[00:15:53]There's not those many assets liquid assets that one can buy that you know you can get high returns on. It's ease of doing business is still complicated.

[00:16:02]There are still you know Supreme Court rulings regulatory rulings that happen which seem to throw on bring up uncertainty about the rules of the game in India and so companies and investors are cautious about coming in because of that. So what this is these are all areas that require fixing and I think it's important to do to address all of these issues. That's where also the focus should be you know kept alongside of course helping households and uh businesses with this current conflict.

[00:16:34]>> In in conclusion the prime minister seemed to suggest in his when he spoke at a gathering that coidl like we could be in a coidl like situation. Of course, the co years uh saw uh a demand fall as well as of course supply side shocks as well. Do you believe it's fair to liken what what could be happening in the next few months if this conflict continues to a coidlike situation or would that be an exaggerated fear?

[00:17:01]You know, if this conflict continues and we're looking at oil at now at $140 a barrel and expected to stay there for the foreseeable future, it's a problem not not just for India, frankly, it's a problem for the world. And we're looking at global growth going to 2 and a half% or even 2%. So that is a very large major shock for the world economy.

[00:17:22]you know the basic point that when you're faced with a shock of this kind it's not possible for the government to come in and just you know smooth it over and say that we we can fix the problems for you I think that's a fair statement it requires some adjustment it requires adjustment I again I think that the Indian economy has come into this in with enough strength that this is not definitely not a moment to panic this is a moment where you know as the prime minister says it requires as adjustment voluntary restraint but I also think importantly through the signals that's provided through the rupee uh and through prices at the pump. I'm going to leave it there uh Gita Gopinat. Um obviously as I said we spoke last month and with every month the situation uh gets uh more and more difficult to manage and of course if this crisis continues through the summer then it throws up many more issues some of which we'll of course come back to you to discuss but I appreciate you taking the time off and talking to us here. Thank you very much.

[00:18:24]Thank you.