No targets for rupee, it's market play: RBI governor

Two days after the rupee briefly breached the 90-per-dollar mark for the first time, Reserve Bank of India (RBI) governor Sanjay Malhotra on Friday reaffirmed that the central bank does not target any exchange-rate level and that it relies on market forces to determine the currency’s value.

The Indian currency opened at 89.84 against the greenback on Friday, but weakened again following the Monetary Policy Committee's announcement of a rate cut before pulling back and then ended at 89.98.

RBI's rate-setting panel lowered the policy repo rate by 25 basis points to 5.25% in a unanimous decision, Governor Sanjay Malhotra said. The committee also retained the "neutral" policy stance, though external member Ram Singh was of the view that the stance should be changed to “accommodative”.

Addressing concerns over the currency’s sharp swings following the 25-basis-point policy rate cut, Malhotra said the RBI steps in only to curb excessive volatility, not to defend any specific line in the sand. The Indian unit moved in a range of 38 paise during the day, touching a high of 89.6900 to a dollar.

“Our stated policy always has been that we allow the markets to determine. I mean we don't target price levels or any bands. We allow the markets to determine prices. We believe that the markets, in the long run especially, are very efficient,” he said at a post-policy press conference, adding that the rupee is part of a “very deep market”.

He pointed to the rupee’s rebound earlier this year—when it reversed from nearly 88 to below 84 within three months—as an evidence of its resilience.

To a query on whether the central bank’s tolerance band for rupee’s volatility had increased, Malhotra said it's very hard to put a formula on the same. “...it’s more of an art than science over there, and so that's what we try to do in managing (volatility in the rupee),” he said.

The governor's statement comes in the backdrop of the Indian rupee's depreciation by 5% against the dollar so far in 2025, becoming the worst performing currencies among emerging economies. Sustained outflows of foreign capital, a delay in the US-India trade deal and limited RBI intervention took the Indian unit to its all-time low of 90.43 on Thursday.

The path ahead

“The rupee had already adjusted ahead of policy, with notable depreciation earlier in the week. A move beyond 90 could draw calibrated RBI intervention,” V.R.C. Reddy, head of treasury at Karur Vysya Bank said.

Analysts now expect the currency to trade in a broader 88.00-91.20 per dollar range in the near term. While a potential bilateral trade agreement between the India and the US could offer some temporary appreciation, they believe fundamentals, particularly softer capital inflows, will keep the pressure on.

“Every dip in the rupee will be bought into. The appreciation, if any, led by the US-India trade deal, will be short-lived,” Ritesh Bhansali, deputy chief executive officer at Meckali Financial Services, said.

As the RBI expects inflation to remain benign in FY26, it said the risk from depreciation is estimated at 35 bps for every 5% fall and it is already factored into the projections.

RBI Deputy Governor Poonam Gupta also addressed recent discussions about the International Monetary Fund’s (IMF) classification of India’s exchange-rate regime. She said India remains a “managed float” similar to most emerging markets, with the RBI intervening only to limit undue volatility.

The IMF’s reference to a “crawling peg,” she said, simply reflects cross-country comparisons of observed volatility and should not be over-interpreted.

The IMF has reclassified India's de facto exchange rate regime from a “stabilized” system to a crawl-like arrangement.

External sector mixed signals

The governor emphasized that the external sector remains “very comfortable”, supported by a manageable current account deficit (CAD), ample foreign exchange reserves and healthy capital flows.

“We do believe that we are having sufficient reserves. The current account is manageable at about 1% or so, and given the strong fundamentals of our country, we should get good capital flows as well going forward,” Malhotra said. He also reiterated that the recent $5-billion rupee-swap was purely a liquidity tool, and not an attempt to bolster the currency.

Malhotra’s policy statement painted an overall mixed but stable picture of India’s external position.

In the September quarter, India's current account deficit eased to 1.3% of GDP, sharply lower from 2.2% of GDP a year ago, aided by strong services exports and robust remittances.

While merchandise exports contracted in October and imports rose for a second month, widening the trade deficit, the governor said the strength in services would keep the CAD “modest” through the year.

On capital flows, he said gross foreign direct investments rose at a “robust pace” in the first half of FY26 and that net foreign direct investments had improved as repatriation declined. However, foreign portfolio investment flows recorded outflows of $0.7 billion so far in FY26, driven by selloffs in equities.