Abstract：Former Reserve Bank of India (RBI) Governor Raghuram Rajan has cautioned against trying to hold the rupee at a specific level by drawing down foreign exchange reserves, arguing that some currency weakness can be tolerated in the current environment. According to The HinduBusinessLine, which reported his interview with Reuters on Tuesday, Rajan said India should not "fixate on a number" for the currency or run down reserves to defend it.
The rupee has lost about 6 per cent 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, the report said. For forex beginners, USD/INR is the price of one US dollar in Indian rupees, so a rising number means the rupee is weakening.
Former Reserve Bank of India (RBI) Governor Raghuram Rajan has cautioned against trying to hold the rupee at a specific level by drawing down foreign exchange reserves, arguing that some currency weakness can be tolerated in the current environment. According to The HinduBusinessLine, which reported his interview with Reuters on Tuesday, Rajan said India should not “fixate on a number” for the currency or run down reserves to defend it.
The rupee has lost about 6 per cent 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, the report said. For forex beginners, USD/INR is the price of one US dollar in Indian rupees, so a rising number means the rupee is weakening.
ContentsRajan's Case for Restraint
“I think the first response would be, don't panic,” Rajan told the Reuters Global Markets Forum. He warned that there was scope for the current account deficit to widen further if oil prices stayed elevated. The current account deficit is the gap between what a country earns from exports and what it spends on imports; a wider deficit can add pressure on a currency.
Rajan, now the Katherine Dusak Miller Distinguished Service professor of finance at the University of Chicago Booth School of Business, said he would take a “very sensible view” and look at the longer term, examining whether the situation is an outlier relative to past episodes. He also argued that some currency depreciation is not necessarily a bad thing in this kind of environment, because it allows a country to stabilise exports and makes its goods more competitive.
His comments come as high oil prices, surging US Treasury yields and continuing foreign equity outflows have compelled the central bank to step up intervention to limit cascading risks to inflation and broader financial stability, according to the report. Earlier in October, RBI Governor Sanjay Malhotra did not rule out using monetary policy measures to stabilise the currency.
The Cost of Defending a Level
India has deployed about half of the over $140 billion secured through special measures earlier in 2026 to support the currency and absorb surplus banking system liquidity, the report said. Rajan questioned whether those funds should be spent on defending a particular exchange rate. “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. FCNR(B) deposits are foreign currency non-resident bank deposits, a channel India has used to attract dollar inflows.
Rajan also flagged external risks. If the Middle East war reignites and Gulf energy infrastructure is hit, oil-consuming emerging markets would suffer, he said. “As they say, 'you ain't seen nothing yet,' if this really gets that bad.”
The report noted that Rajan took charge as RBI chief in 2013, at the time of a crisis when India was seen as part of the “fragile five” economies, a group of emerging markets then viewed as vulnerable to capital outflows.
What Traders Are Watching
The debate over reserve use comes against a volatile stretch for the rupee. On Monday, 19 October 2026, the rupee gained 9 paise to 94.80 against the US dollar in early trade, supported by the ongoing impact of the RBI's structural forex interventions, according to ETBFSI. It opened at 94.90 and touched 94.80, while on the preceding Friday it had settled 10 paise higher at 94.89.
Traders quoted in that report said the rupee had seen its sharpest rally in seven months, but a surge in Brent crude to $110 per barrel posed the biggest threat to the recovery. CR Forex Advisors MD Amit Pabari said that with USD/INR holding below 95.00 for three sessions, focus had shifted to 94.80-94.70, and that a sustained break below 94.80 could open the way towards 94.00 over the coming weeks. He added that elevated crude prices remained a key risk and that the rupee's next move would depend on whether oil eases or sustains its surge.
Separately, RBI data released on Friday showed India's foreign exchange reserves dropped by $8.578 billion to $726.027 billion in the week ended 9 October 2026. In the previous reporting week, reserves had dropped by $12.952 billion to $734.606 billion, the ETBFSI report said.
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