India is scrambling to salvage a sinking rupee as surging oil prices linked to the Middle East conflict threaten to disrupt the world’s fastest-growing major economy.
The currency has dropped more than five percent since the crisis erupted in February, extending losses from 2025 and making it Asia’s worst-performing major currency in 2026 so far.
It hit a record low of over 96 to the dollar on Friday, prompting officials to signal that halting further depreciation is a key macroeconomic priority.
India’s central bank has already poured billions of dollars to stabilise the currency, curbed speculative trading and offered a special credit line to oil importers to ease dollar demand.
Prime Minister Narendra Modi has also urged voluntary austerity measures to rein in dollar-guzzling imports, including cutting down on gold buying and foreign travel for a year.
But the pressure persists.
“The whole system has been disturbed,” said Dilip Parmar of stockbroker HDFC Securities, citing heavy foreign investor outflows, weaker growth prospects and elevated crude prices.
“That is the basic problem which you’re seeing replicated in the fall of the rupee,” he said, noting that it was ultimately “a function of demand and supply” with dollar demand being higher.
The rupee’s slide comes as India faces a widening current account deficit driven by costly energy imports.
The gap is likely to be over two percent of GDP this fiscal year, more than double last year’s level and potentially the widest since 2012–13, according to Bank of America Securities estimates.
– Widening deficit –
At the same time, foreign investors have dumped more than $20 billion in Indian stocks since the start of the Mideast conflict, the fastest pace on record, while dollar inflows have slowed, opening the possibility of a balance-of-payments gap as large as $67–88 billion.
The 2027 fiscal year “will be our third year of a balance-of-payment deficit, which is certainly unusual,” economist Dhiraj Nim of ANZ Research told AFP.
This strain has weighed on the rupee, prompting the central bank to defend it by burning through foreign exchange reserves — now at around $697 billion, down from over $720 billion before the Middle East war.
While still covering about 11 months of imports, the decline underscores the strain.
A weaker rupee is rippling through the domestic economy.
Manufacturers and food processors, many dependent on imported raw materials priced in dollars, are seeing costs surge.
Smaller firms often lack the ability to hedge currency risks.
