Raghuram Rajan, the former governor of the Reserve Bank of India (RBI), has a blunt message for policymakers: stop fixating on a specific number for the rupee. In an interview with Reuters on Tuesday, Rajan urged India not to burn through its foreign-exchange reserves just to defend a particular exchange rate, as the currency has fallen about 6% so far in 2026 and touched a record low of 96.96 against the US dollar in May.
Rajan's comments come at a tense moment for Indian markets. The rupee's slide has been driven by a familiar mix: high oil prices, rising US Treasury yields, and foreign investors pulling money out of Indian stocks. These forces not only pressure the currency but can also feed into domestic inflation and financial stability concerns.
Why defending a currency level can backfire
When a central bank sells dollars to prop up its currency, it drains rupees from the banking system. That tightens liquidity, which can push up short-term borrowing costs and ripple through the broader economy. Rajan's warning is essentially that India shouldn't spend its ammunition on a battle it hasn't historically tried to win.
Reuters reported that India has already used about half of the more than $140 billion it raised through special measures earlier this year. Rajan said it would be “a shame” to spend that money so quickly defending a level the country hasn't historically tried to hold.
The former governor's broader point is that some depreciation isn't automatically bad. A cheaper rupee makes Indian goods and services more competitive abroad, which can help exporters. But there's a catch: if oil stays expensive, India's current account deficit—the gap between what the country earns from the rest of the world and what it spends—could widen, keeping pressure on the currency.
What this means for Indian markets
For investors, the first sign of trouble may not be the headline exchange rate. Instead, watch onshore liquidity and money-market rates. When the RBI intervenes heavily, it can tighten financial conditions at home, even if the rupee's fall slows.
Reuters also noted that RBI Governor Sanjay Malhotra hasn't ruled out using monetary-policy tools to steady the currency. That could mean higher short-term borrowing costs, which would hit Indian banks' funding costs and potentially cool foreign demand for local stocks and bonds.
The front end of the government-bond curve—shorter-dated bonds—could also feel the pinch, with yields firming as liquidity tightens. That's a dynamic investors have seen before, and it's one reason why India's bond market has been holding steady despite the rupee's slide.
The oil factor and the current account
Oil is the wildcard. India imports most of its crude, so when prices climb, the import bill swells. That widens the current account deficit and adds to the rupee's downward pressure. With oil hovering near $115 a barrel, the pressure is real. Indian shares have already dipped as oil prices stay elevated and the Federal Reserve's next move looms.
Rajan's point is that India shouldn't fight the tide with reserves alone. A more flexible approach—letting the rupee find its level while managing inflation and growth—might be more sustainable in the long run.
What investors should watch
For everyday investors, the key takeaway is that currency weakness isn't always a disaster. It can help exporters and make Indian assets cheaper for foreign buyers. But it can also stoke inflation, especially if oil stays high, and that could influence the RBI's interest-rate decisions.
If the RBI shifts its focus to stabilising the rupee, expect tighter liquidity and possibly higher short-term rates. That could weigh on bank stocks and rate-sensitive sectors. On the other hand, if the central bank lets the rupee depreciate more freely, the impact on inflation and the current account deficit will be the next thing to watch.
Rajan's warning is a reminder that defending a currency level is a costly game. For India, the smarter play may be to let the rupee breathe—and save those reserves for a rainy day.
