Gradual depreciation preferable to burning reserves to defend a level, says former RBI Governor Duvvuri Subbarao

A former RBI Governor articulated a clear framework: it is preferable to allow the rupee to depreciate gradually rather than deplete foreign exchange reserve...

What Happened

A former RBI Governor articulated a clear framework: it is preferable to allow the rupee to depreciate gradually rather than deplete foreign exchange reserves attempting to defend a specific exchange rate level.
The argument is grounded in economic reasoning — forex reserves are a finite, finite buffer; a sustained defense of an overvalued level creates a larger eventual adjustment when reserves run low, rather than a smooth correction.
The rupee depreciated approximately 9% in FY 2025-26, reaching around ₹93.88 per US dollar. Market estimates suggest RBI sold $26–27 billion in the forex market during March 2026 alone to slow — not stop — the currency's fall.
India's forex reserves stand at approximately $700.9 billion, below their late-February 2026 peak. The view expressed was that reserves must be preserved to cover "liquidity at risk" over extended periods, not deployed to defend a price level.
The IMF classifies India's exchange rate regime as a "crawl-like arrangement" — allowing gradual weakening with intervention to prevent disorderly volatility, but not targeting a specific level.

Static Topic Bridges

India's Exchange Rate Regime: Managed Float

India officially operates a managed floating exchange rate regime, meaning the rupee's value is primarily determined by market forces (supply and demand in the foreign exchange market), but the RBI intervenes periodically to curb excessive volatility, smooth one-sided movements, and prevent disorderly market conditions. This is distinct from a fixed exchange rate (pegged to another currency) and a pure float (zero intervention). In practice, the IMF's Annual Consultation classification for India has historically ranged between "other managed arrangement" and "crawl-like arrangement" — reflecting active but non-targeting intervention.

Regime: Managed float (de facto); the RBI's stated policy is to intervene only to curb volatility, not to target a level
RBI Governor's stated position (April 2026): "Forex market curbs won't remain forever" — signalling temporary nature of restrictions
RBI intervention tools: Spot market (buying/selling USD), forward market, forex swap auctions
Real Effective Exchange Rate (REER): Adjusts nominal rate for relative inflation; rupee was assessed as overvalued in REER terms — supporting the case for gradual nominal depreciation

Connection to this news: The argument for gradual depreciation is consistent with REER-adjusted fair value: if the rupee is overvalued in real terms, nominal depreciation restores export competitiveness without requiring reserve depletion, which is the economically preferable adjustment path.

Foreign Exchange Reserves: Purpose, Adequacy Metrics, and Limits

India's foreign exchange reserves — comprising foreign currency assets (the dominant component), gold, Special Drawing Rights (SDRs) at the IMF, and India's reserve tranche with the IMF — serve multiple purposes: covering import payments, servicing external debt, maintaining confidence in the currency, and enabling intervention. The RBI manages reserves to ensure "adequate" coverage across multiple metrics, not just import cover.

Total reserves (April 2026): approximately $700.9 billion (below late-February 2026 peak)
Import cover standard: IMF's minimum recommendation is 3 months of imports; India maintains approximately 10–12 months — far above the minimum
Short-term external debt coverage: Reserves should cover at least 100% of short-term debt maturing within a year (Greenspan-Guidotti rule)
Composition: Foreign Currency Assets (largest), Gold (~8–9%), SDRs (~1%), IMF reserve tranche (~0.5%)
Opportunity cost of excess reserves: Reserves are typically held in low-yield, liquid US Treasury securities — holding excess reserves has an opportunity cost relative to domestic investment

Connection to this news: The case for not burning reserves to defend a specific rupee level is precisely that reserves serve multiple adequacy metrics — import cover, debt coverage, confidence buffer. Depleting them for level-defense sacrifices these functions for a temporary price peg.

FEMA and the Legal Framework for Forex Transactions

The Foreign Exchange Management Act, 1999 (FEMA) replaced the earlier Foreign Exchange Regulation Act, 1973 (FERA), shifting the regulatory philosophy from control to management. Under FEMA, current account transactions (trade in goods and services, remittances) are generally freely permitted, while capital account transactions (equity investment, debt, derivatives) require RBI permission or are subject to limits. The RBI, as the designated authority under FEMA, has broad powers to regulate forex derivative transactions, position limits for banks, and offshore market access — powers it exercised in March 2026 when it imposed temporary curbs on rupee derivatives.

FEMA enacted: 1999; replaced FERA 1973
Current account convertibility: Full (India has maintained this since 1994)
Capital account convertibility: Partial (full convertibility is an ongoing policy aspiration)
FEMA Section 10: RBI's powers to authorise Authorised Dealer (AD) banks for forex transactions
Net Open Position (NOP): Cap on banks' unhedged forex exposure — RBI can tighten/loosen to manage speculation

Connection to this news: When market participants engage in speculative one-way bets on rupee depreciation through derivative markets (both onshore and offshore NDF markets), the RBI uses its FEMA-derived powers to impose position limits, curb specific transaction types, and restore two-way market conditions — all without targeting a specific exchange rate level.

Oil Shocks, Current Account Deficit, and Rupee Pressure

A sustained rise in global crude oil prices creates a direct adverse impact on India's current account deficit (CAD), since oil is India's largest import item. Higher CAD increases the net supply of rupees in the foreign exchange market (more rupees are sold to purchase dollars for oil payments), mechanically exerting downward pressure on the currency. The West Asia conflict in 2026 combined an oil supply disruption risk with elevated global freight costs, amplifying this channel.

India's crude oil import dependence: ~85–87% of requirements met through imports
Rule of thumb: Every $10/barrel rise in crude oil prices raises India's CAD by approximately $14–15 billion
FY26 rupee depreciation: approximately 9%, reaching ₹93.88/USD by late FY26
Estimated RBI forex sales in March 2026: $26–27 billion (to slow — not stop — the fall)
Rupee depreciation pass-through to inflation: ~0.1–0.2% CPI per 5% rupee depreciation (limited but present)

Connection to this news: The case for gradual depreciation becomes stronger in an oil shock scenario: if the currency must eventually weaken to reflect higher import costs and a wider CAD, allowing an orderly depreciation preserves reserves for genuine emergencies while letting the exchange rate perform its equilibrating function.

Key Facts & Data

Rupee depreciation in FY26: approximately 9% (to ~₹93.88 per USD)
India's forex reserves: approximately $700.9 billion (April 2026)
Estimated RBI forex sales in March 2026: $26–27 billion
IMF's reserve adequacy minimum: 3 months of imports; India maintains ~10–12 months
India's exchange rate regime (IMF classification): "Crawl-like arrangement"
FEMA, 1999: Legal framework for forex management; replaced FERA 1973
Current account convertibility: Full since 1994
Capital account convertibility: Partial; policy objective to achieve full convertibility over time
Greenspan-Guidotti rule: Reserves should cover 100% of short-term external debt maturing within one year
Oil import rule of thumb: $10/barrel crude rise → ~$14–15 billion CAD widening for India
REER: Real Effective Exchange Rate — rupee assessed as overvalued in real terms, supporting gradual nominal depreciation