Why RBI Is Aggressively Defending the Rupee Amid Global Oil and Currency Pressures

The Reserve Bank of India’s aggressive intervention to stabilise the rupee has sparked a wider debate among economists and policymakers over whether the central bank should continue defending the currency or allow market forces to determine its value.

As crude oil prices surged amid escalating tensions in West Asia, the Indian rupee came under heavy pressure, briefly touching a record low of 96.96 against the US dollar earlier this month before recovering following strong intervention by the RBI.

To contain volatility, the central bank has reportedly been selling between $800 million and $2 billion daily through spot and forward market operations. India’s foreign exchange reserves, which stood at a record $728.49 billion in late February, declined significantly during this period before showing a modest recovery in May.

The RBI has also announced a $5 billion dollar-rupee swap auction scheduled for May 26 to manage liquidity pressures arising from sustained intervention in currency markets.

The ongoing debate intensified after economist and Finance Commission chairman Arvind Panagariya argued that the rupee should be allowed to weaken naturally if market conditions demand it. According to this view, foreign exchange reserves should not be excessively used to defend symbolic currency levels.

However, many experts believe India’s economic structure makes rapid rupee depreciation risky. Unlike China, which successfully used a weaker currency to boost exports after building a strong manufacturing ecosystem, India remains heavily dependent on imports for crude oil, electronics components, solar equipment, batteries and industrial raw materials.

India imports nearly 89 per cent of its crude oil requirements, making the economy highly vulnerable to currency weakness and rising energy prices.

Economists warn that a sharp fall in the rupee would immediately increase fuel prices, transportation costs, fertiliser subsidies, food inflation and household expenses. Higher import bills could also place additional pressure on government finances and corporate debt servicing.

The article notes that many Indian industries operate as “assembly economies” rather than fully localised manufacturing ecosystems. As a result, exporters often do not gain significantly from a weaker rupee because the cost of imported components and raw materials also rises simultaneously.

For example, sectors such as electronics, engineering goods and renewable energy rely heavily on imported chips, machinery, battery materials and industrial inputs priced in dollars. While exporters may earn more rupees per dollar, their production costs rise almost equally, limiting the overall advantage.

The debate also highlights how global trade dynamics have changed significantly in recent years. Unlike the era of rapid globalisation that benefited China’s export-led rise, the current global environment is shaped by supply-chain realignments, industrial subsidies, localisation policies and geopolitical tensions.

Experts argue that in today’s environment, long-term manufacturing competitiveness depends more on infrastructure, logistics, technology and supply-chain resilience than simply maintaining a weak currency.

The RBI’s current strategy is therefore being viewed as an attempt to prevent disorderly depreciation rather than permanently defend any fixed exchange rate.

Alongside intervention in currency markets, policymakers are also exploring measures to attract foreign capital, including special schemes for non-resident Indian deposits and easier investment conditions for global investors.

The central bank has made it clear that while gradual depreciation may be manageable, a sudden panic-driven fall in the rupee could severely impact inflation, investor confidence and overall economic stability.

The broader challenge for India, analysts say, is to use this period to strengthen domestic manufacturing, reduce import dependence and build industrial ecosystems that can support long-term currency stability without heavy intervention.