RBI’s Quiet Confidence Lets Markets Set The Rupee’s Course

The Reserve Bank of India is watching the world drift toward a currency war—and mostly staying out of it. As the United States and China escalate tariff hostilities, Governor Sanjay Malhotra has made it clear that the RBI will not chase every ripple in the rupee. India, he suggests, has earned the luxury of staying calm.

It’s not bravado. India’s external vulnerability is far lower than that of many emerging markets due to its low trade interconnectedness, Malhotra reckons. Exports account for just 12% of GDP, and shipments to the US barely cross 2%. The current account deficit for the first nine months of the fiscal year came in at 1.3% of GDP, and with foreign exchange reserves at $676.3 billion, the RBI has ample firepower but little reason to deploy it. The central bank is intervening only to smooth “excessive” volatility—not to protect any level.

That restraint is deliberate. Currency management by stealth has returned to global policy circles, especially as the Chinese yuan slides lower—nudged, perhaps, by Beijing to offset tariff pain. A weaker yuan risks imported inflation for India and could spook capital flows. Yet the RBI sees no reason to act pre-emptively. It wants the rupee to move with market forces, not on central bank diktat.

So far, the bet is holding. The rupee dropped to a record 87.95 against the dollar in January, before recovering nearly 2%. Annualised volatility rose from 1.4% to 4.4%, but the RBI stepped in only when markets wobbled too much. Unlike peers, who chase orderly depreciation or scramble to defend levels, India’s central bank is telegraphing quiet confidence.

Underlying that confidence is a structural story. India’s role in global supply chains is expanding as manufacturers diversify away from China. With nearly 11 months of import cover and a modest external gap, India is better placed to ride out trade-linked tremors.

The RBI is using this macro space not to micromanage but to signal stability.

That doesn’t mean blind optimism. If China lets the yuan slip further and others retaliate, Asia could be pulled into a currency spiral. In that case, Malhotra may need to recalibrate. But for now, the RBI sees more merit in anchoring expectations through policy discipline than through aggressive intervention.

In a market where central banks are again tempted to play favourites with their currencies, India’s quiet withdrawal from the battlefield stands out. The RBI is betting that fundamentals will do the heavy lifting. So far, that bet is paying off.