Since the beginning of 2026, the Indian rupee has come under visible pressure, though the extent of its decline has often been overstated.
From around ₹91.5 per US dollar on February 28—the onset of the current geopolitical conflict—the currency weakened to the ₹92.5–$93 range, implying a depreciation of roughly 1 percent during the war period, even though it had briefly fallen by over 4 percent earlier in the year.
This movement triggered anxieties in both policy and market circles, with some analysts projecting a sharp slide toward ₹100 per dollar. Yet exchange rate dynamics are rarely a linear reflection of macroeconomic fundamentals. They are shaped as much by sentiment, expectations, and speculative positioning as by the underlying demand–supply equilibrium of currencies.
The rupee’s long-term trajectory has historically been one of gradual depreciation, punctuated by phases of volatility. What distinguishes the present episode is not the direction of movement, but the confluence of external shocks—most notably the geopolitical tensions involving the United States, Israel, and Iran—and their transmission into financial markets.
Between late February and the end of March 2026, the rupee depreciated by approximately 3.3 percent before stabilising, suggesting that the worst of the turbulence was contained within a relatively short window.
A key transmission channel has been capital flows. In March alone, foreign investors withdrew ₹88,180 crore from Indian equities, reversing the net inflows of ₹22,615 crore seen in February. This sharp reversal reflects a classic flight to safety during global uncertainty, placing downward pressure on the rupee.
Simultaneously, the surge in crude oil prices—up by nearly 45 percent since the onset of the conflict—has compounded the stress. Given that India imports nearly 85 percent of its crude oil requirements, every price increase translates into higher demand for dollars, widening the trade deficit and exerting further pressure on the currency.
These external pressures have also begun to intersect with domestic macroeconomic concerns. While inflation had remained broadly under control prior to the conflict, the combination of a weaker rupee, elevated import costs, and disrupted supply chains risks rekindling inflationary pressures.
Moreover, the government’s decision to absorb a significant portion of the fuel price shock—rather than fully passing it on to consumers—has increased fiscal strain. An expanding fiscal deficit, if not managed carefully, can reinforce inflationary expectations and, in turn, weigh further on the currency.
Against this backdrop, the role of the Reserve Bank of India (RBI) assumes critical importance. The central question has been whether intervention in the foreign exchange market—particularly through the sale of dollars—would meaningfully stabilise the rupee or merely deplete foreign exchange reserves without durable impact. Critics have argued that such interventions are ultimately futile in the face of strong market forces.
However, a closer examination suggests that this view underestimates both the timing and the design of the RBI’s actions. The current pressures on the rupee are largely exogenous and transient, rather than reflective of structural weaknesses in the Indian economy. In such situations, allowing unchecked depreciation can amplify instability through speculative behaviour. The RBI’s interventions, therefore, have served not to artificially prop up the currency, but to smooth volatility and anchor expectations.
This stabilisation has been achieved through a combination of calibrated measures. While dollar sales in the spot market have played a role, they have been complemented by liquidity management tools such as currency swaps, which enable temporary support without permanently drawing down reserves.
Regulatory tightening has also been significant. By capping open positions for banks, restricting activity in the non-deliverable forward (NDF) market, and limiting the re-booking of cancelled forward contracts, the RBI has effectively curtailed speculative excesses that tend to exacerbate currency swings.
These measures have had a measurable impact. Despite heightened demand for dollars, including substantial outflows by foreign portfolio investors, India’s foreign exchange reserves have remained broadly stable—declining only marginally from their peak levels earlier in the year. This resilience underscores the effectiveness of the RBI’s strategy in balancing intervention with prudence.
More broadly, the episode highlights a critical policy insight: exchange rate management in an open economy cannot be reduced to a binary choice between free markets and intervention. In periods of stress, especially when volatility is driven by external shocks and speculative activity, a calibrated intervention strategy is essential to preserve macroeconomic stability.
That said, short-term stabilisation measures cannot substitute for long-term structural correction. The underlying vulnerability of the rupee is closely tied to India’s persistent trade deficit, driven in part by heavy import dependence—even in sectors where domestic production is feasible. Addressing this imbalance requires a strategic recalibration of industrial and trade policy.
Reducing reliance on imports through targeted domestic manufacturing is an obvious starting point. In sectors where the cost differential between imported and locally produced goods is marginal, selective tariff adjustments could incentivise domestic production without imposing excessive burdens on consumers. Such measures, if carefully designed, can simultaneously strengthen industrial capacity, reduce the trade deficit, and support currency stability.
Ultimately, the recent episode should not be interpreted as a crisis of the rupee, but as a stress test of India’s macroeconomic framework. The RBI’s response demonstrates that, when deployed judiciously, policy tools can effectively manage volatility without compromising long-term stability. The challenge now lies in complementing these short-term responses with structural reforms that address the deeper drivers of external vulnerability.
(The author is National Co-convener, Swadeshi Jagran Manch and Former Professor, PGDAV College, University of Delhi; Views expressed are personal)
