'Don't Panic': Raghuram Rajan Warns RBI Against Depleting Forex Reserves To Defend Currency

Former Reserve Bank of India (RBI) Governor Raghuram Rajan has cautioned against using substantial foreign exchange reserves to defend a particular rupee exchange rate, urging policymakers to adopt a longer-term perspective.

As per a Reuters report, Rajan said India should avoid becoming overly concerned about specific currency levels.

The rupee has depreciated approximately 6% in 2026, making it Asia's second-worst-performing currency. It touched a record low of 96.96 against the US dollar in May.

"I think the first response would be, don't panic," Rajan said.

Depreciation Could Support Indian Exports

Rajan argued that moderate currency depreciation need not necessarily harm the economy, particularly when exporters face challenging global conditions.

A weaker rupee could improve the competitiveness of Indian products in international markets, he said.

However, he warned that persistently elevated crude oil prices could widen India's current account deficit.

Higher energy costs, rising US Treasury yields and continued foreign equity outflows have increased pressure on the currency.

The RBI has consequently stepped up market interventions to contain risks to inflation and financial stability.

Earlier this month, RBI Governor Sanjay Malhotra indicated that monetary policy measures could also be considered to stabilise the rupee.

Rajan advised policymakers to assess whether current currency movements were exceptional compared with previous episodes.

Forex Reserve Deployment And Oil Price Risks Raise Concerns

India has reportedly deployed approximately half of the more than $140 billion raised through special measures earlier this year to support the currency and manage banking system liquidity.

Rajan questioned whether funds attracted through Foreign Currency Non-Resident (Bank) deposits should be rapidly used to defend an exchange rate.

He stressed that India had historically avoided maintaining a fixed currency level.

The former governor also warned that renewed conflict in West Asia, particularly attacks on Gulf energy infrastructure, could severely affect oil-importing emerging economies.

Rajan, now a finance professor at the University of Chicago Booth School of Business, previously headed the RBI during the 2013 currency crisis, when India was classified among the world's "fragile five" economies.