The RBI and rupee's last line of defence

The Reserve Bank of India (RBI) has launched one of its most aggressive currency-defence operations in years, spending billions to stabilize the rupee after it hit an all-time low of 96.96 against the dollar on May 20. Since March, when the rupee traded around 93.98 per dollar, the central bank has intervened daily through spot and forward market operations, depleting foreign exchange reserves from a peak of $728.49 billion in late February to $690.69 billion by early May. Market estimates suggest the RBI sold between $800 million and $2 billion daily to curb volatility, though reserves later recovered slightly to $696.99 billion by May 8 due to a rise in gold holdings. To further manage liquidity pressures, the RBI announced a $5 billion dollar-rupee buy-and-sell swap auction for May 26. Economists like Arvind Panagariya, chairman of India’s 16th Finance Commission, argue the RBI should allow the rupee to weaken naturally rather than burn reserves defending an arbitrary threshold. They cite mainstream economic theory and figures like Gita Gopinath, who has urged emerging-market central banks to avoid unnecessary intervention. However, critics warn India’s economic structure differs sharply from China’s, which weaponized a weak currency after becoming a manufacturing powerhouse. India’s economy relies heavily on imports—89% of its crude oil, electronics components, and renewable energy materials—making it vulnerable to external shocks. Unlike China, which produced most of what it exported, India’s sectors are often assembly-based, leaving it ill-equipped to benefit from a weaker currency without risking inflation or economic instability. The debate highlights India’s dilemma: whether prolonged intervention is sustainable or if a weaker rupee is inevitable despite its risks. The RBI’s actions reflect a balancing act between protecting the currency and preserving reserves in a global economy where supply chains remain fragile.