IMF urges India to allow rupee more flexibility amid US rate pressures

The US Federal Reserve’s interest rate decisions are creating challenges for India’s exchange-rate policy, prompting discussions about allowing the rupee more flexibility. Higher US yields make dollar assets more attractive, drawing capital away from emerging markets like India, increasing borrowing costs, and putting pressure on currencies. The Reserve Bank of India (RBI) faces the dilemma of how much to resist this pressure without depleting foreign-exchange reserves or tightening domestic interest rates excessively.

The International Monetary Fund (IMF) has suggested that India should allow the rupee greater freedom to adjust to external shocks, arguing that monetary policy should focus on domestic price stability. The RBI should intervene in the foreign-exchange market only to prevent disorderly movements, rather than defending a specific rupee-dollar level. This approach would help absorb external shocks without requiring large adjustments in domestic interest rates or reserves.

In September 2026, the rupee faced significant pressure following a 25 basis point increase in the US federal funds rate to 3.75%-4%. The rupee briefly weakened beyond ₹96 to the dollar before recovering. The IMF’s 2025 Article IV assessment noted that India’s limited foreign-exchange mismatches, deep currency market, and adequate reserves make it well-equipped to handle such pressures. The RBI should use reserves primarily to prevent disorderly market conditions rather than to maintain a fixed exchange rate.

The RBI must balance the need to manage currency volatility with the cost of excessive intervention. Aggressive responses to currency weakness can strain reserves and shift the burden of adjustment to borrowers, consumers, and businesses. The IMF has also encouraged private-sector entities to manage currency risks through hedging, noting that around two-thirds of external commercial borrowings were hedged as of September 2024. India’s reserves stood at $765.9 billion in September 2026, falling to $747.6 billion the following week, illustrating the cost of resisting pressure on the rupee.