The Reserve Bank of India (RBI) has an information advantage over other stakeholders in the markets it regulates. The measures it takes from time to time are evidence-based, pre-emptive, and prudential. They are best understood as tactical measures to address market distortions before they hinder efficient market functioning. By promoting orderliness, these measures ultimately contribute to the sound and vibrant development of the market.

Seen in this light, the RBI’s recent foreign exchange market measures do not suggest any panic. Since March, the RBI has cut open position limits, introduced a foreign exchange risk reserve and restricted non-deliverable forward activity through GIFT City to genuine hedging, among other measures.

These measures can also be read as a signalling strategy conveying that market integrity and orderly functioning are in the interest of all and hence the responsibility of all. Once market expectations are shaped by those of the regulator, the experience has been that the RBI moves to restore the status quo ante. Besides its regulatory oversight, the RBI has a developmental role in which improving the market’s depth, sophistication and cross-border integration are integral elements.

India has traditionally managed the impossible trinity through intermediate solutions rather than choosing between its ‘corners’. The rupee is market-determined, but the RBI intervenes to curb undue volatility. Capital account liberalisation is treated as a process rather than an event, with macroprudential measures available to back up foreign exchange interventions when capital flows become excessively volatile.

This approach preserves the independence of monetary policy while allowing the exchange rate to absorb external shocks without excessive volatility impeding this insulating role. The recent measures need to be viewed as tactical responses within this established framework rather than any reversal of financial market development.

The geopolitical situation has worsened in 2026. There is no fierce, synchronised monetary policy tightening now as in 2022–23; instead, each country is pursuing its own pathway. Each country is more on its own than it was then, and must craft its own ways to secure and preserve macroeconomic and financial stability amid heightened uncertainty and stress.

The Rupee in Perspective
The mobilisation of close to $150 billion through foreign currency non-resident deposits and other schemes, and the prospect of a balance of payments surplus, need to be assessed against overwhelming global forces affecting all currencies. The rupee’s exchange rate is not immune to them.

In recent years, capital flows have increasingly dominated exchange rate dynamics. Their volatility can overwhelm developments in the current account, including the hedging of current account transactions, making the exchange rate particularly sensitive to changes in global risk appetite. Consequently, even substantial foreign exchange inflows need not translate into an appreciating currency when global portfolio flows are moving in the opposite direction.

Conflicts around the world are disrupting supply chains, energy, and commodity markets, and triggering sharp sell-offs in emerging market currencies and reversals of capital flows. The volatility of crude prices is affecting all net energy importers. The artificial intelligence investment frenzy is driving rapid shifts in portfolio flows, while bond markets worldwide are experiencing massive sell-offs.

Given these largely exogenous developments, the rupee’s volatility appears relatively contained. Exchange rate movements need to be assessed over time. Last year, there was an animated narrative that the rupee was in free fall into a bottomless pit. The eventual outcome was a depreciation of 4.3% in the average annual exchange rate during 2025–26 (April–March), compared with the average annual exchange rate for 2023–24, very much aligned with the longer-term trend and reflecting the modest current account/saving-investment gap. This year will not be different. The myopia of sensationalising immediate developments needs to give way to a broader, longer-term perspective on the exchange rate.

Building foreign exchange reserves through various means, strengthening the policy framework and fortifying macroeconomic fundamentals, as India is doing, are essential elements of the national risk management strategy in a world of geopolitical strife, trade frictions and heightened economic policy uncertainty. It is difficult to imagine the state of the rupee if these actions had not been undertaken.

Monetary Policy and the Rupee
The exchange rate cannot be relied upon to act as an automatic stabiliser. Since the advent of floating exchange rates, its behaviour has been characterised by overshoots, self-fulfilling expectations, bandwagon effects, multiple disequilibria and several generations of currency crises. Central banks therefore monitor exchange rate movements closely and continuously, and intervene in various ways to ensure orderly outcomes, because exchange rate volatility can have real economy consequences and engender financial instability.

Besides the exchange rate being a potent channel for the transmission of global financial instability spillovers, there are India-specific reasons for this caution.

India's gross foreign liabilities, comprising debt and equity, substantially exceed its foreign exchange reserves, exposing the economy to exchange rate risk. Moreover, although exchange rate pass-through to inflation has declined over time, episodes of heightened volatility can produce a fuller pass-through. Exchange rate stability is therefore not merely a financial market concern. It has implications for inflation, balance sheets and financial stability.

The RBI has consistently followed the strategy of focusing monetary policy on price stability, keeping in mind the objective of growth. Exchange rate management is achieved through foreign exchange intervention and macroprudential measures to curb undue volatility, without any view on the level of the exchange rate. This strategy has served India well and should continue.

The RBI will do what it has to do in the best national interest, given the evolving situation. India has an inflation targeting framework with inbuilt flexibility and laid out accountability procedures. It has demonstrated that inflation reverts to the target, even after black swan events such as the pandemic and geopolitical conflicts.

Communication and Confidence
The RBI also has a wealth of information on the basis of which analyses and practical research can be put out in the public domain to help the public understand how its teams look at various issues. In my time, articles in the Bulletin, working papers and Occasional Papers on practical issues confronting day-to-day functioning were published.

They may be deficient in many ways (after all, which research is perfect!) and they may be contestable, but they offered an insight into how issues can be examined from various angles, including economic analysis, statistical approaches and artificial intelligence and machine learning methods, as well as applied finance approaches from the Centre for Advanced Financial Research and Learning.

Many analysts and researchers outside the RBI, especially in the markets, have found them valuable in understanding these points of view. Timely and patient communication to shape expectations could help promote orderly market activity and bolster market confidence. 

* Some parts of this column first appeared in an interview to Reuters