Is RBI really supposed to defend the rupee amid ongoing crisis?

It’s not the Reserve Bank of India’s job to save a falling rupee. This might sound controversial in a country where every fall in the rupee triggers prime-time panic and political outrage. But it is also the truth.

If you do not believe it, read the RBI’s own mandate. The RBI's preamble says the central bank exists “to regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in India” and to operate the country’s currency and credit system “to its advantage”.

Notice what is missing. There is no line promising that the RBI will protect the rupee at Rs 80, Rs 90 or even Rs 100 against the dollar.

Because that is not its real job.

WHAT DOES THE RBI DO?

The RBI’s actual job is much bigger and much more boring: control inflation, maintain financial stability, manage liquidity and make sure the economy does not spiral during global shocks.

“The RBI is legally mandated to maintain monetary stability, financial stability and orderly market conditions — not any fixed rupee value,” said Dr Manoranjan Sharma, Chief Economist at Infomerics Ratings.

And yet, every time the rupee weakens, India reacts like the economy itself is collapsing.

Television debates begin. Opposition parties attack the government. Market experts start discussing whether the rupee could touch Rs 100 against the dollar and how it will break household finances.

And the assumption is almost always the same: if the rupee is falling, the RBI must stop it.

But should it?

That question matters more now because the rupee’s slide has become impossible to ignore. When Narendra Modi became Prime Minister in 2014, the rupee traded near Rs 58 against the dollar. By May 2026, it had weakened sharply and recently touched record lows near Rs 97 amid rising crude oil prices, foreign investor outflows and global uncertainty.

This has naturally spooked citizens, who have been flooded with warnings about how a falling rupee could make life more expensive — from fuel and imports to foreign travel and education.

And while it is true that a weaker rupee does put pressure on the economy, the harsher reality is that no central bank can completely prevent a currency from weakening during a global shock like the ongoing West Asia conflict, which has pushed up crude oil prices and rattled financial markets.

These are forces far bigger than the RBI can manage/control. And that is precisely why economists increasingly argue that obsessing over defending symbolic exchange-rate levels may itself be misguided.

Because aggressively protecting the rupee can sometimes create even bigger problems for the economy.

India, after all, does not run a fixed exchange-rate system.

WHEN SHOULD RBI INTERVENE?

Unlike countries that tightly peg their currencies to the dollar, India follows what economists call a “managed float” regime. The rupee is broadly allowed to move according to market forces while the RBI steps in occasionally to smooth excessive volatility or panic.

“Central banks perform best when inflation expectations remain anchored and exchange rates adjust gradually to fundamentals,” Sharma said.

In simpler language, the RBI’s job is not to freeze the rupee at artificial levels forever. And over the years, the central bank itself seems to have learned this the hard way.

For a long time, emerging-market central banks often treated currency defence like a prestige battle. If the currency weakened sharply, central banks intervened aggressively, sold dollars, tightened liquidity and tried to calm markets.

India did the same.

A LESSON LEARNT THE HARD WAY

During the 2013 “taper tantrum”, global investors rapidly pulled money out of emerging markets after signals of tighter US monetary policy. The rupee came under severe pressure and the RBI intervened heavily.

Again in 2018, when the rupee weakened sharply beyond Rs 72 to the dollar, markets kept second-guessing whether the RBI was intervening enough.

Then came 2022. The US Federal Reserve began aggressively raising interest rates. The dollar surged globally. Oil prices climbed. Emerging-market currencies came under pressure everywhere.

The RBI sold billions of dollars from India’s forex reserves to slow the rupee’s fall.

And yet the rupee weakened anyway.

Meanwhile, India witnessed one of the sharpest declines in forex reserves among major emerging economies during parts of that period.

That experience appears to have reinforced a difficult lesson: central banks cannot permanently overpower market fundamentals.

At best, they can slow panic.

That distinction is important because many people still assume the RBI’s role is to defend the rupee like a border post defending territory.

Modern central banking no longer works that way.

In fact, since 2016, the RBI’s monetary policy framework has formally revolved around inflation targeting — not exchange-rate targeting.

Under India’s Flexible Inflation Targeting regime, the RBI’s primary objective is to keep retail inflation around 4%, with a tolerance band of plus or minus 2%.

That is the central bank’s real scoreboard, not the rupee-dollar exchange rate flashing on television screens.

And there is a reason for that.

THE IMPOSSIBLE TRINITY

Economists often talk about something called the “impossible trinity” or the Mundell-Fleming trilemma. It sounds like something designed to terrify economics students, but the idea itself is simple.

No country can simultaneously maintain: a fixed exchange rate, free movement of capital, independent monetary policy.

It can only choose two.

India has largely chosen relatively free capital movement and independent monetary policy. Which means the exchange rate has to adjust eventually.

That is why economists argue the RBI cannot endlessly defend a rigid rupee level without sacrificing something else — growth, liquidity, exports or inflation management.

“In EMEs like India, moderate depreciation during global stress is generally considered normal,” Sharma said.

“Annual rupee declines of roughly 3–8% can occur during periods of high crude oil prices, rising US interest rates or a strong dollar cycle.”

That is also why economists like former IMF Deputy Managing Director Gita Gopinath and former Planning Commission Deputy Chairman Montek Singh Ahluwalia recently defended the RBI amid criticism over the rupee’s weakness.

Gopinath argued policymakers should focus more on inflation, jobs and economic output than symbolic exchange-rate levels. Ahluwalia similarly argued that exchange rates should adjust during external shocks instead of forcing the central bank to endlessly defend a number.

Because trying too hard to protect the rupee can itself become risky.

THE PRICE OF PROTECTING RUPEE

When the RBI intervenes heavily, it sells dollars from India’s foreign exchange reserves to support the currency.

But reserves are not infinite.

“Foreign exchange reserves function as a national insurance buffer against crises involving sudden capital flight, import financing stress or external debt pressures,” Sharma said.

“If the RBI spends reserves excessively defending the rupee during routine volatility, it may weaken confidence in India’s ability to withstand larger shocks later.”

There is another problem too. Artificially defending an unsustainable currency level can invite speculative attacks if markets sense the central bank is fighting a losing battle.

“Persistent intervention may delay necessary economic adjustments while increasing long-term vulnerability to external shocks and capital reversals,” Sharma warned.

Economists also argue that defending a currency too aggressively can weaken exports and tighten domestic financial conditions unnecessarily.

“To defend the rupee, central banks may raise interest rates or tighten liquidity even when domestic growth is slowing,” Sharma said.

“Such actions can suppress investment, weaken credit growth and worsen unemployment.”

WHY DOES RBI STILL INTERVENE AT TIMES?

That is why many economists now argue that a gradual, orderly depreciation is often healthier than exhausting reserves merely to defend short-term currency optics.

“A gradual, orderly fall is often healthier than defending an overvalued currency through excessive reserve depletion or restrictive monetary tightening,” Sharma said.

This is also why economists become irritated when public debate turns into panic over round numbers. When the rupee crossed Rs 80, panic followed. Now Rs 100 has become the next psychological red line. But economists repeatedly argue these numbers are more emotional than economically meaningful.

Arvind Panagariya, chairman of the Finance Commission and former NITI Aayog vice-chairman, recently put it bluntly: “100 is just a number, like 99 and 101.”

And he is right.

Currencies naturally weaken over long periods because inflation rates differ across countries. A falling currency does not automatically mean the economy is collapsing.

The real danger is not whether the rupee touches a symbolic number. The real danger is whether the fall becomes disorderly enough to destabilise inflation, markets and investor confidence.

And that, economists say, is the line the RBI is actually trying to defend. Not a number. The economy itself.