India, May 20 -- The rupee is once again under siege. The trigger this time is the Iran conflict which has sharply escalated global crude prices. Brent crude, which was trading at $72 a barrel when the strikes began, has surged to nearly $110 this week, sharply inflating India's import bill and putting enormous pressure on the external account. The rupee, meanwhile, has weakened from Rs.91 to Rs.96 to the dollar - a depreciation of over 5% in barely eight weeks. Yet, to see this as merely a crisis caused by oil would be to miss the deeper story. The rupee has, in fact, been under pressure for the past several years because of persistent capital outflows driven by both push and pull factors. The push factors are domestic. Strong inflows from domestic retail investors into equities and mutual funds have driven valuations sharply higher, making Indian assets appear expensive. Foreign investors who compare opportunities globally have exited India to more attractive shores. The pull factors are global. Capital is increasingly being drawn toward economies associated with technological leadership, particularly the US-led AI boom and sectors such as semiconductors, biotech, and advanced manufacturing. India may remain the fastest-growing major economy, but it is seen as only a marginal player in frontier technologies. As money rotates toward these "innovation economies", sustained pressure on the rupee has become inevitable. The government and the Reserve Bank of India (RBI) are now engaged in a determined effort to prevent a disorderly depreciation of the currency. The first line of defence is RBI intervention in the foreign exchange market. RBI sells dollars and absorbs rupees to moderate volatility and prevent panic. Market intelligence suggests that RBI has been intervening quite aggressively over the past few weeks. India's foreign exchange reserves - still around the $700 billion mark - undoubtedly provide comfort. But that comfort should not be overstated. As the adage goes, any amount of reserves looks like too much in normal times and too little in crisis times. The danger is not merely depletion of reserves; it is the credibility trap. If RBI is seen to be intervening heavily and is yet unable to arrest the rupee's fall, markets may conclude that the central bank is losing the battle. Confidence can then evaporate abruptly, setting off a free fall in the exchange rate. When it comes to battling an exchange rate crisis, a failed defence is worse than a no defence. Once markets sense that the central bank's resolve or firepower is inadequate, speculative pressures can intensify dramatically and destabilise broader financial markets as well. Curtailing imports is another important policy option. In an effort towards this, the governmentraised customs duties on gold andsilver. This is, however, a trickybalancing act. Raise duties too high and smuggling becomes attractive again. Keep duties too low, and households, fearful of inflation and financial instability, rush into gold as a hedge. India's historical and cultural affinity for gold makes this particularly difficult to manage duringperiods of uncertainty. Then there are capital flow management measures aimed at encouraging inflows and discouraging outflows. One option reportedly under active discussion is a special bond issue targetted at non-resident Indians. India has successfully used this instrument before, most notably during the taper tantrums of 2013. But it is far from clear whether that success can be replicated today. The global context has changed dramatically. In 2013, the world was awash with liquidity and interest rates in advanced economies were near zero. Today, liquidity is tight and global interest rates are elevated. Any NRI bond issue now would carry a significantly higher cost. In addition, banks would need to hedge the currency risk, and the cost of that hedge would ultimately have to be borne on the combined balance sheet of the government and RBI. More importantly, markets may not be reassured by one-off inflows like NRI bonds. What India needs is not episodic emergency financing but sustained foreign direct investment and portfolio inflows anchored in confidence about India's medium-term economic prospects. The most important thing in an exchange rate crisis is marketpsychology. Policymakers must remember that markets under stress behave in capricious ways. The lesson from the taper tantrums of 2013is instructive. In an effort to curb capital outflows, as RBI governor, I reduced the amount resident Indians could remit abroad under the Liberalised Remittance Scheme from $250,000 to $200,000 annually. The market reaction was swift and brutal: The rupee fell 10% in less than two weeks. I was puzzled and flustered by this sharp reaction. After all, RBI had tweaked capital controls to manage external stress several times in the past. Why then did the market react so violently? The answer lies in expectations. Investors interpreted my decision not as a temporary emergency measure but as a signal of a broader regime change, in fact, a reversal of India's capital account liberalisation policy. That perception deepened anxiety and reinforced negative sentiment on the currency. Exchange rate crises are not pretty. At heart, they are crises of confidence. In panic situations, negative expectations feed on themselves and create vicious downward spirals. If market participants believe the rupee will weaken further, they behave in ways that make it weaken further. Exporters delay repatriating export proceeds. Importers rush to prepay for shipments. Households buy gold and dollars. Capital seeks safety abroad. What begins as expectation turns into reality - a classic case of self-fulfilling prophecy. The challenge before the government and RBI, therefore, is not merely technical management of reserves, interest rates or import duties. It is the management of expectations. Policymakers must act decisively without showing despair, intervene without appearing defensive, and communicate firmly without creating panic. It is better, as Keynes said, to be roughly right than precisely wrong....