Rupee defence should not come at the cost of rapidly exhausting India's foreign exchange reserves, former Reserve Bank of India governor Raghuram Rajan said on October 27, 2026. He urged policymakers to accept further currency weakness if necessary rather than commit to protecting a predetermined exchange-rate level.

Key Takeaways

  • Rajan urged India to preserve reserves rather than defend a fixed rupee level.
  • The rupee has depreciated about 6% in 2026 amid pressure from oil prices, US yields and foreign equity outflows.
  • Rajan warned that sustained high oil prices could widen India's current account deficit.

Rupee defence should not target a fixed level

Speaking at the Global Markets Forum, Rajan called for a longer-term assessment of the currency's weakness rather than a response driven by panic. Policymakers should judge whether the current pressure is exceptional compared with earlier episodes, he said.

His warning focused on the pace and purpose of reserve use, particularly after India mobilised substantial foreign currency resources earlier in 2026. India has used about half of the more than $140 billion raised through special measures to support the rupee and absorb surplus banking-system liquidity.

Rajan said it would be unwise to rapidly exhaust funds raised through the FCNR(B) route merely to protect a currency level that India had not historically sought to maintain at all costs.

Currency pressure tests the limits of intervention

The rupee has depreciated about 6% so far in 2026. Elevated crude oil prices, rising US Treasury yields and continued foreign equity outflows have accompanied the pressure, prompting the RBI to intensify intervention to contain potential spillovers into inflation and financial stability.

Earlier in October, RBI Governor Sanjay Malhotra left open the possibility of using monetary policy measures to stabilise the currency. Rajan's comments are advice from a former governor, not an announcement of a change in RBI policy.

The distinction between smoothing volatility and defending a fixed level has a historical policy basis. The RBI's November 2024 explanation of foreign-exchange intervention described the rupee as determined by market demand and supply, with intervention intended to smooth undue volatility and maintain orderly markets. That explanation provides policy context, not verification of the currency's 2026 performance or recent reserve use.

Rajan weighs export benefits against oil risks

Rajan argued that depreciation need not always harm the economy: a weaker rupee can make Indian goods more competitive internationally and support exports.

He nevertheless warned that persistently elevated oil prices could widen India's current account deficit. A renewed escalation of conflict in the Middle East, particularly damage to Gulf energy infrastructure, could impose substantially greater strain on oil-importing emerging economies, he said. That was a conditional risk warning, not a forecast that such damage would occur.

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