The rupee has emerged rather robust from its severe crisis in recent months. Fairly stable in the Rs 82-83/$ range during most of 2024, it started slipping from end 2024 onwards. By end January 2026, it had fallen to Rs 91.68/$, almost a 5% drop over a year. Starting from this weakness, after America attacked Iran on February 28, 2026, and crude oil prices rose to above $100 a barrel, intraday the rupee fell as low as 97.05 against the dollar on May 19 before the Reserve Bank of India (RBI) intervened to support it.The rupee at 100 is not merely a numberGrowing concerns that it could weaken below Rs.100/$ triggered a debate. Should RBI intervene to prevent this?Aravind Panagariya, the l6th Finance Commission chair, in a social media post, requested RBI to not intervene. According to him, if economic fundamentals manifest in higher crude oil prices and weaken the rupee, it is best to let the corrective forces of the market operate. A weaker rupee will curb imports and may also boost exports, thus rectifying the trade imbalance.Shamika Ravi, an economist with the government, stated that 100 is just a number, a psychological benchmark best ignored. From this standpoint, there is no more justification to support the rupee when it is falling from say 95 to 100, as compared to 90 to 95 against the dollar.While the overall policy of letting the exchange rate be market-determined is sound, in my opinion it is too simplistic when there is substantial foreign exchange (FX) trading. Financial markets are notoriously prone to momentum effects. Instead of being self-correcting, a drop can trigger a further drop, and vice versa for a rise. When a certain benchmark is crossed, usually a round number, then momentum often builds for a further decline.Thus, the rupee at 100 is not merely a number. It could further slide and that is hugely harmful to the economy.In such situations, tactical intervention can certainly curb damaging momentum effects. Although the RBI basically has a flexible exchange rate policy, in sync with the established domestic policy of inflation targeting, its stated goal and practice is to intervene to reduce disorderly currency movements and volatility.RBI intervention to support the rupeeThe RBI usually intervenes in response to what it considers to be a steep drop, as distinct from a small, gradual decline which it invariably allows. Further, it launches special schemes to attract capital inflows to support the rupee in a crisis. The last such crisis was in September 2013, in response to the end of the US Federal Reserve’s (Fed) Quantitative Easing. The special scheme worked quite well, with the rupee rising from 68.61 to 61.78 per dollar between September 4, 2013, to the end of the year.Following prolonged weakness in May this year, when the rupee averaged 95.54 per dollar, RBI launched the Foreign Currency Non-Resident (B) and related schemes on 8 June 2026. The FCNR(B) deposits are paying about 6-7% – much more than equivalent US dollar Certificates of Deposit (about 3-4%) – with the principal guaranteed in dollars at maturity, which is a huge incentive.The RBI pays for the cost of hedging the exchange rate risk. Moreover, there have been some options to leverage the investment, therefore providing a multiple of the 200 to 300 basis point direct excess return. It could be called the FCNR (Bonanza) scheme!The scheme was closed at the end of August, due to enormous amounts that were pouring in. Supporters of the scheme jubilantly claim that this is a vote of confidence in the Indian economy. However, such claims are clearly exaggerated. Critics could point to much smaller inflows from OFCB (Overseas Foreign Currency Borrowing) and ECB (External Commercial Borrowing) schemes launched simultaneously.Unlike deposit flows into banks, driven by lucrative excess returns, inflows from OFCBs and ECBS indicate a willingness of entrepreneurs to invest in specific projects and indicates a vote of confidence in India’s growth. Combined OFCBs and ECBs were about a paltry US$9 billion. compared to US$127 billion in FCNR(B) deposits. What the huge inflows reveal is the confidence of the depositors in the RBI that their excess returns in dollars are guaranteed.Table 1. Rupee exchange rate and foreign exchange reserves during 2026MonthJan-26Feb-26Mar-26Apr-26May-26Jun-26Jul-26Aug-26Sep-26Rs./US$90.7590.7392.8093.4995.5495.0695.9495.3595.31FX reserves (US$ billion)701.71721.97703.24698.11687.40673.69680.16723.51783.24Brent crude oil (US$)64.7769.4199.60102.46104.0984.6284.8288.08102.07Source: Exchange rate data are from finance.yahoo.com, and FX reserves data are from the RBI. Note: (i) Monthly average of daily closing rate and monthly average of weekly FX reserves. (ii) September data are up to the 23rd of the month. Monetary policy entails the art of coping and firefighting. That has been done successfully by providing substantial sops to FCNR(B) depositors. From a longer-term perspective, will this turn out to have been a wise policy? That depends on how long crude oil prices remain high and related to whether the Fed hikes rates or not.If the Hormuz Strait War miraculously ends and crude returns to say around $70 a barrel, its pre-war level, then the Fed will postpone its anticipated interest rate hikes. Further the crucial US long-term Treasury bond yield, which has risen sharply above its benchmark ‘ceiling’ of 5% and is now destabilising the global financial system, is likely to ease. But this is wishful thinking.The more likely scenario is that the Hormuz Strait War persists. Crude oil prices will remain high, with ensuing Fed rate hikes and bond yields remaining above 5%. Hence pressure on the rupee will remain and the RBI may not be able to defend it without huge depletion of FX reserves. If a month from now, FX reserves have fallen to below the pre-scheme level of around $670 billion while the rupee also inches closer to the Laxman Rekha of 100, critics of the FCNR(B) scheme could justifiably call it a failure.Intervention ought to be rule-based, rather than discretionaryThe current travails have arisen because RBI interventions, in my opinion, have been ad hoc. There is no way either the RBI or FX traders can know in advance how long the oil shock is going to last. While intervening to reduce exchange-rate volatility without having a specific target for the exchange rate is desirable, such intervention should be rule-based, rather than discretionary.Specifically, a daily ‘random walk band’ exchange rate target is transparent and reasonably feasible to implement, given the RBI’s huge stock of reserves. The basic idea is simple. Based on the previous day’s closing rate or some other reference rate, the RBI should set a target band of say 0.5% for the next 24-hour period. Suppose the rupee closes at 95 per dollar today.Then the RBI should step in to buy dollars if the rupee rises to 94.525/$ and to sell dollar if the rupee weakens to 95.475/$. The rupee can then rise (or fall) at most by 2.5% a week over five trading days and, at most, gradually by 10% in a month. However, such repeated declines are not very likely. Thus, volatility is contained.Details of such a scheme have been spelt out by in my paper titled “Stop the Specter of a Rising Rupee” in Far Eastern Economic Review (June 2007), a special issue featuring an interview with Nobel laureate Robert Mundell, the intellectual father of the currency the Euro, and in other articles that I wrote that year, following the jump in the rupee by 10% in early April 2007.Although that episode is dated, from a policy perspective, it is far from outdated. The daily random walk band being proposed here is a variation of that scheme. Moderate controls on capital inflows and outflows will greatly help the RBI in maintaining the random walk band. On this matter too, policymakers have been remiss in not learning from the 2007 episode to pragmatically clamp down on capital flows.Vivek Moorthy was previously Senior Economist, Foreign Exchange Function, Federal Reserve Bank of New York.This article was originally published on Ideas for India.