Raghuram Rajan has cautioned India against excessively using its foreign exchange reserves to defend the rupee, highlighting the need to preserve reserves amid currency pressures. His remarks underscore the trade-offs between supporting the rupee, maintaining external stability, and safeguarding resources against future economic shocks.
India should avoid targeting a specific exchange rate or exhausting its foreign exchange reserves to defend the rupee, former Reserve Bank of India (RBI) Governor Raghuram Rajan said in an interview with Reuters on Tuesday. He urged policymakers to take a longer-term view of currency movements and avoid excessive intervention as global economic pressures weigh on the Indian currency.
The rupee has lost about 6% of its value so far in 2026, making it the second-worst-performing currency in Asia. It also hit a record low of 96.96 in May, reflecting mounting pressure from elevated crude oil prices, rising US Treasury yields, and continued foreign equity outflows. These factors have increased pressure on India’s external balances and prompted the central bank to step up its efforts to contain currency volatility and protect broader financial stability.
“I think the first response would be, don’t panic”, Rajan told the Reuters Global Markets Forum, warning that there was scope for the current account deficit to widen further if oil prices stayed elevated.
As one of the world’s largest crude oil importers, India remains vulnerable to sustained increases in global energy prices. More expensive oil raises the country’s import bill, increases demand for dollars, and can put additional downward pressure on the rupee. A widening current account deficit could intensify these pressures, particularly if foreign investors continue to withdraw capital from domestic equity markets.
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Rajan, who now serves as the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago Booth School of Business, said policymakers should assess the rupee’s weakness against previous episodes of market stress rather than attempt to maintain an arbitrary exchange-rate level.
“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,” said Rajan, now the Katherine Dusak Miller Distinguished Service professor of finance at the University of Chicago Booth School of Business.
He also highlighted the potential benefits of currency depreciation in a challenging global environment. “Some currency depreciation is not necessarily a bad thing in this kind of environment. It allows âyou to stabilise your exports (and) makes your goods more competitive”.
India has deployed about half of the more than $140 billion secured through special measures earlier this year to support the rupee and absorb surplus liquidity from the banking system. Rajan cautioned against using these resources primarily to defend a predetermined exchange-rate level, particularly after authorities made efforts to attract foreign currency deposits through the FCNR(B) route.
“We just spent a lot of money trying to get the FCNR(B) âmoney in. It would be a shame if that was quickly spent in defending a level, which historically we haven’t done”.
Rajan also warned that a renewed conflict in the Middle East could worsen conditions for oil-importing emerging economies if attacks disrupt Gulf energy infrastructure. “As they say, ‘you ain’t seen nothing âyet’, if this âreally gets that bad”.
Rajan became RBI governor in 2013, when India faced significant external financing pressures and featured among the economies labeled the ‘fragile five’.
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