Rajan cautioned against excessive use of foreign exchange reserves to support the currency in order to keep it at a predetermined level.
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The rupee has depreciated about 6% so far in 2026, making it Asia’s second-worst performing currency. It touched a record low of 96.96 in May, as external pressures weighed on the currency.
Speaking to Reuters at the Global Markets Forum, Rajan urged policymakers to avoid panic and assess the situation against previous episodes of currency stress. He also warned that India’s current account deficit could widen further if oil prices remain elevated.
Rajan, now the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago Booth School of Business, said policymakers should take a longer-term view and determine whether the current situation represents an exceptional episode compared with past periods of pressure.
Rajan argued that currency depreciation need not always be detrimental to the economy. A weaker rupee can help Indian goods remain competitive in international markets and support exports by making them more attractive to overseas buyers.
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The currency has come under pressure from elevated crude oil prices, rising US Treasury yields and continued foreign equity outflows. These factors have prompted the central bank to intensify its market intervention to contain the potential spillover effects on inflation and broader financial stability.
Earlier this month, RBI Governor Sanjay Malhotra had left open the possibility of using monetary policy measures to stabilise the currency.
However, Rajan cautioned against using the reserves to defend a particular exchange-rate level, especially after India mobilised substantial foreign currency resources earlier this year.
India has used about half of the more than $140 billion raised through special measures earlier this year to support the rupee and absorb surplus liquidity in the banking system.
Rajan said it would be unwise to rapidly exhaust funds raised through the FCNR(B) route merely to defend a currency level that India had not historically sought to maintain at all costs.
He also flagged the risks posed by a potential escalation of the conflict in the Middle East. If hostilities resume and energy infrastructure in the Gulf is damaged, emerging economies that rely heavily on oil imports could face even greater economic strain.
Rajan warned that such a scenario could bring significantly more severe consequences for oil-consuming emerging markets than those already being experienced.
Rajan took charge as RBI governor in 2013, when India was regarded as one of the “fragile five” economies facing heightened external vulnerabilities.
Rajan's latest comments come amid renewed pressure on the rupee and concerns over the impact of global energy prices and capital flows on India’s external balances.
Inputs from Reuters and other agencies