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Informist, Thursday, Jun. 4, 2026

 

By Shubham Rana and Pratiksha

 

NEW DELHI – The Indian rupee remains under immense pressure against the dollar because of the war in West Asia, prompting some economists and market participants to call for interest rate hikes to defend the currency, including on Friday. However, former members of India's Monetary Policy Committee Informist spoke to warned against using interest rates as a tool to manage the exchange rate.

 

"First of all, exchange rates do not come under the ambit of the MPC, which is tasked only with inflation and growth objectives," said Jayanth Varma, who was on the committee between October 2020 and August 2024. "So, the question of the MPC defending the rupee does not arise," Varma told Informist.

 

The rupee's fall of over 6% against the dollar in 2026, after a 5?cline in 2025, has led to expectations that the Reserve Bank of India's rate-setting panel could raise the repo rate, currently at 5.25%, by 25-50 basis points. Since the Monetary Policy Committee last met on Apr. 8, the rupee has depreciated over 3% against the dollar. In May, the Indian currency fell to a record low of 96.96 against the dollar.

 

Economists at ANZ Banking Group, Standard Chartered Bank, Capital Economics, and MUFG Bank expect a 25-bps rate hike on Friday. To be fair, most economists and market players polled by Informist expect status quo on interest rates and stance on Friday.

 

"While the MPC has reiterated that its repo rate decisions are driven more by domestic growth and inflation dynamics than by the need to defend the currency, the sharper-than-expected pace of INR depreciation raises the risk of second-order effects on CPI and, in our view, strengthens the case for a hike," Standard Chartered Bank said in a report on May 21.

 

"Raising interest rates to defend the rupee does not work," said Ashima Goyal, who served on the committee as external member alongside Varma. "It failed in 2013. It only hurt growth and raised risk premia. It compromises our freedom to moderate external shocks," Goyal told Informist.

 

Economists have also flagged that using interest rate hikes as a tool to defend the currency would require a sharp rise in rates to be effective and would be associated with significant growth costs, and hence, should be avoided at this point.

 

According to former RBI deputy governor Michael Patra, who was part of the committee since its inception in 2016 until 2024, the RBI has followed a "judicious approach" of assigning monetary policy to price stability while keeping in mind the growth objective.

 

"Exchange rate management is conducted through market interventions, macro prudential tools and capital flow measures," Patra told Informist. "This assignment has worked well in securing the independence of monetary policy while enabling a reasonably orderly evolution of the exchange rate assessed by its rate of change over a period of time - say, three years, five years, 10 years, or even 20 years - rather than at specific points of time, and it should continue."

 

Former committee members suggested the RBI should continue intervening in the foreign exchange market to curb "undue" volatility and speculation. "Yes, the RBI should intervene to prevent excess volatility and persistent real misalignment," Goyal said. "The INR has massively over-depreciated and will soon correct as it always has after past crises. This incident is no different. It is only prolonged because oil shocks followed the Trump tariffs."

 

Goyal and Patra also expressed confidence in the RBI's buffers, including foreign exchange reserves, to help manage the situation. "The RBI's foreign exchange reserves remain among the highest in the world and are adequate in terms of various metrics," Patra said. "These reserves are on the balance sheet of the RBI and should not be adjusted for off-balance sheet forward liabilities, which can be managed flexibly off the balance sheet like being rolled over or offset against forward assets," he added.

 

India's foreign exchange reserves fell to an over 13-month low of $681.38 billion as of May 22, almost $50 billion lower from the record high just before the war started. Moreover, the RBI's short forward dollar book has grown close to $100 billion as of Apr. 30.

 

Goyal warned against measures such as higher deposit rates for non-resident Indians. "With almost ($) 600 billion currency reserves accumulated with a BOP surplus in 29 of the 35 years after liberalisation, buffers are strong, and will grow again in future," Goyal said. "There is no need to pay more to acquire another few billion."

 

She suggested that the RBI could strengthen swap lines with other central banks and the government could look at reforms to make foreign inflows easier.  End

 

US$1 = INR 95.77

 

Edited by Avishek Dutta

 

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