India should not deplete reserves to defend rupee, Rajan says

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India rupee reserves advice

Highlights

India's rupee has depreciated about 6% in 2026, reaching a record low of 96.96 in May, with reserves down by half of the $140 billion raised earlier this year.
Raghuram Rajan advises against aggressively depleting foreign exchange reserves to defend the rupee, suggesting policymakers allow some depreciation to support exports and competitiveness.
Persistent high oil prices, rising U.S. Treasury yields, and foreign equity outflows heighten inflation and financial stability risks, leading to increased RBI intervention and possible monetary policy action.

Rupee pressure and reserve strategy

As reported by Reuters, Rajan says India should not "fixate on a number" for the rupee or rapidly run down foreign exchange reserves to defend the currency as external pressures build.

The rupee has lost about 6% of its value so far in 2026, making it the second-worst performing currency in Asia, and it hit a record low of 96.96 in May. Rajan tells the Reuters Global Markets Forum that the first response should be not to panic, while warning there is scope for the current account deficit to widen further if oil prices stay elevated.

He says policymakers should take a longer-term view and assess whether the current situation is an outlier relative to past episodes. In his view, some currency depreciation is not necessarily harmful in this environment because it helps stabilise exports and makes Indian goods more competitive.

India has deployed about half of the more than $140 billion secured through special measures earlier this year to support the currency and absorb surplus banking system liquidity. Rajan says it would be a shame if funds raised through FCNR(B) measures were quickly spent defending a particular exchange-rate level, which he notes India has not historically done.

Risks for inflation and financial stability

High oil prices, surging U.S. Treasury yields and continuing foreign equity outflows are compelling the central bank to step up intervention to limit cascading risks to inflation and broader financial stability. Earlier this month, RBI Governor Sanjay Malhotra does not rule out using monetary policy measures to stabilise the currency.

Rajan also warns that oil-consuming emerging markets would suffer if the Middle East war reignites and Gulf energy infrastructure is hit. He says the strain could deepen significantly under that scenario, underscoring his argument that India should conserve policy firepower rather than exhaust reserves defending the rupee.

In our earlier article on the RBI’s rupee-defence operations, we described how the central bank deployed an estimated $75–$80 billion from the more than $140 billion raised via special FX measures, using spot sales and swaps to support the currency and manage liquidity. We also outlined the key pressures behind the intervention—higher oil prices, rising U.S. Treasury yields and foreign equity outflows—and the debate over how much usable reserve firepower India has if depreciation accelerates.

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