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

"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. Why is the Indian rupee falling? 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.

Why does Rajan oppose defending the rupee at any cost? Rajan's argument is not that the RBI should ignore the rupee's decline. Rather, he believes policymakers should avoid committing excessive resources to maintaining a particular exchange rate when broader economic conditions are pushing the currency lower. 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. Why is spending foreign exchange reserves a concern? Foreign exchange reserves act as a financial buffer, helping a country meet external payment obligations and manage periods of market stress. When the RBI sells dollars to support the rupee, it uses some of those reserves.

Intervention can help smooth sharp movements, but it may prove costly if underlying pressures persist for an extended period. 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, according to the figures cited in the report. Rajan, , now the Katherine Dusak Miller Distinguished Service professor of finance at the University of Chicago Booth School of Business, specifically cautioned against quickly using the funds raised through foreign currency non-resident bank (FCNR(B)) deposits to defend a particular exchange-rate level.

"We just spent a lot of money trying to get the FCNR(B) money in. It would be a shame if that was quickly spent in defending a level, which historically we haven't done," he said. His concern is that India should not use funds raised through such measures simply to hold the rupee at a specific level, particularly if global factors continue to weigh on the currency. That does not mean foreign exchange intervention has no role.

The RBI may still use its reserves to contain excessive volatility and prevent disorderly market conditions. The challenge is to balance near-term currency stability with the need to preserve reserves for future shocks. Could the Middle East conflict push the rupee lower? Rajan warned that the situation could become more difficult for oil-importing emerging economies if the Middle East conflict reignited and energy infrastructure in the Gulf were hit.

Such a development could disrupt oil supplies, push crude prices higher and increase India's import costs. "As they say, 'you ain't seen nothing yet,' if this really gets that bad," Rajan said.