Former RBI Governor Raghuram Rajan has advised the central bank to avoid spending foreign exchange reserves to defend the rupee, which has declined 6% this year to near 97 per dollar. He suggests that allowing the currency to reflect market conditions could improve export competitiveness and prevent the unnecessary depletion of reserves amid rising energy costs.
Former Reserve Bank of India Governor Raghuram Rajan has publicly advised the central bank to shift its approach toward currency management. As the Indian rupee continues to face downward pressure, having dropped approximately 6% in 2026 to trade near a record low of 97 per US dollar, Rajan suggested that the RBI should stop prioritizing the defense of specific exchange rate targets.
The Cost of Market Intervention
Data indicates that the central bank has reportedly deployed between $75 billion and $80 billion through spot dollar sales and currency swaps since June to manage volatility. Rajan argued that such significant spending on currency defense is unsustainable in the long run. He specifically raised concerns about the depletion of foreign exchange reserves, noting that relying on these funds to prop up the rupee can expose the economy to unnecessary risks, especially when external pressures remain high.
Balancing Reserves and Export Growth
India currently imports nearly 90% of its crude oil requirements, making the currency vulnerable to global energy price fluctuations. With Brent crude trading near $117 per barrel and US Treasury yields attracting global capital, the rupee faces structural headwinds. Rajan posits that policymakers should not fear a weaker currency. Instead, he suggested that a controlled depreciation could serve as a tool to bolster the competitiveness of Indian exports in a tightening global market. He warned that continuing to intervene in a volatile market, driven by high oil prices and foreign capital outflows, could eventually lead to a more severe depletion of resources that the country might need elsewhere.
For investors, the central monitorable remains how the RBI balances its intervention strategy against the need to preserve foreign exchange reserves. While the RBI has stated its goal is merely to curb extreme fluctuations rather than enforce a fixed peg, the scale of recent spending has drawn attention to the sustainability of these actions. Moving forward, market participants will likely track upcoming trade balance data, foreign institutional investor (FII) flows, and any official updates on monetary policy that might signal a shift in how the central bank manages currency volatility.