Why India should resist the temptation to defend the rupee at any cost, Raghuram Rajan explains

In an interview with Reuters at the Global Markets Forum on Tuesday, October 27, Rajan said policymakers should not "fixate on a number" for the rupee's value or rapidly deplete foreign exchange reserves to defend a particular exchange rate.

"I think the first response would be, don't panic," Rajan said, warning that India's current account deficit could widen further if oil prices remained elevated. The Indian rupee has lost around 6% of its value so far in 2026, making it Asia's second-worst-performing currency, according to the figures cited in the report.

It touched a record low of 96.96 in May. The currency ended Tuesday at 95.1150 against the US dollar, compared with 95.1850 on Monday, marking a gain of less than 0.1%. Here's why Rajan believes India should take a longer-term view of the rupee's weakness, the risks of defending it aggressively and the factors that could determine the currency's next move.

The rupee has reportedly come under pressure from a combination of expensive crude oil, higher US Treasury yields and sustained foreign investor outflows from Indian equities. According to Reuters, the RBI has spent around $80 billion since June to support the currency.

Foreign investors have also net sold around $8.5 billion worth of Indian equities over the past two months, adding to the pressure on the rupee. Brent crude oil was trading at around $117 per barrel during Asian trading hours on Tuesday, close to its highest level in six months.

India imports a substantial share of its crude oil requirements. When oil prices rise, Indian importers need more dollars to pay for energy purchases, increasing demand for the US currency and putting pressure on the rupee.

Higher oil prices can also increase India's import bill, push up domestic inflation and widen the current account deficit — the gap between a country's earnings and payments from international transactions. Meanwhile, rising US Treasury yields can make dollar-denominated assets more attractive to global investors, potentially encouraging capital to move away from emerging markets such as India.

These pressures have prompted the RBI to step up intervention to limit excessive currency volatility and contain risks to inflation and financial stability. A central bank can sell dollars from its foreign exchange reserves and buy rupees to support the domestic currency.

This can help limit sharp declines and reduce volatility, but sustained intervention can also consume reserves. Rajan urged policymakers to assess whether the rupee's current weakness was unusually severe compared with previous episodes instead of reacting solely to the exchange rate.

"I would take a very sensible view and look at the longer term, and examine whether this (situation) is an outlier relative to past episodes," he said. The approach would allow the RBI to distinguish between disorderly market movements that warrant intervention and a depreciation driven by economic fundamentals, such as higher oil prices or a stronger dollar.

Currency depreciation is not necessarily harmful in every situation, Rajan said, adding a weaker rupee can make Indian goods relatively cheaper for overseas buyers, potentially supporting exports and improving their competitiveness.

"Some currency depreciation is not necessarily a bad thing in this kind of environment. It allows you to stabilise your exports (and) makes your goods more competitive," Rajan said.