Former Reserve Bank of India (RBI) Governor Raghuram Rajan has cautioned the Indian government against a panicked approach to the rupee's recent depreciation. Speaking from his position as a professor of finance at the University of Chicago Booth School of Business, Rajan urged authorities not to deplete the nation's foreign exchange reserves in an attempt to defend a specific currency level.
Embrace Depreciation for Export Competitiveness
Rajan's comments come as the Indian rupee has experienced significant volatility, losing approximately 6 percent of its value so far in 2026 and hitting a record low of 96.96 against the US dollar in May. On Tuesday, it further depreciated to 95.22, marking a continued downward trend.
“I think the first response would be, don't panic,” Rajan stated, emphasizing the need for a long-term perspective. He elaborated that some currency depreciation is not necessarily a bad thing in this kind of environment. It allows you to stabilise your exports (and) makes your goods more competitive. This perspective suggests that a weaker rupee can make Indian goods cheaper and more attractive in international markets, potentially aiding economic recovery or growth.
Risks of Depleting Reserves
The former RBI chief specifically warned against hastily spending foreign currency obtained through special measures, such as the FCNR(B) deposits. India has reportedly deployed about half of the over $140 billion secured earlier this year to support its currency and manage banking system liquidity. Rajan expressed concern that rapidly depleting these funds to maintain an artificial rupee level would be a shame, especially given historical precedents where such interventions have not been sustained.
He also highlighted geopolitical risks, particularly the potential for the West Asia war to reignite and impact Gulf energy infrastructure. Such a scenario, he noted, would severely affect oil-consuming emerging markets like India, potentially exacerbating currency pressures.
Underlying Pressures on the Rupee
The rupee's struggles are attributed to several factors:
- Elevated Oil Prices: India's heavy reliance on imported oil makes its currency vulnerable to global crude price shocks. Higher prices increase dollar demand from importers and widen the current account deficit.
- Foreign Capital Outflows: Overseas investors have sold over $30 billion of Indian stocks since early 2026, contributing significantly to the currency's weakness.
- Long-Term Structural Issues: Import dependence, inflation, and a continued reliance on foreign capital for financing persist as underlying challenges.
While the Reserve Bank of India has intervened to curb excessive volatility, analysts suggest that sustained stability will depend on broader economic factors like oil prices, inflation control, export competitiveness, and the ability to attract consistent foreign investment. Uday Kotak, another prominent financial figure, has echoed Rajan's sentiment, advocating that the rupee be allowed to find its own level to reflect economic strength.