India's Struggle to Stabilise the Rupee
India is currently facing a significant challenge in maintaining the stability of its currency, the rupee. The situation has become increasingly urgent due to the rising oil prices that are closely tied to the ongoing conflict in the Middle East. This crisis has put immense pressure on the world’s fastest-growing major economy, threatening to disrupt its economic progress.
The rupee has experienced a sharp decline, losing over 5% of its value since the crisis began in February. This drop has extended losses from 2025 and has made the rupee the worst-performing major currency in Asia so far in 2026. On Friday, the rupee hit a record low of over 96 to the US dollar, prompting officials to emphasize that halting further depreciation is a top macroeconomic priority.
To address this issue, India's central bank has taken several measures, including injecting billions of dollars into the market to stabilize the currency. Additionally, they have curbed speculative trading and provided a special credit line to oil importers to ease the demand for dollars. Prime Minister Narendra Modi has also encouraged voluntary austerity measures to control the import of goods that consume a lot of dollars, such as gold and foreign travel.
Despite these efforts, the pressure on the rupee continues. Dilip Parmar, a stockbroker at HDFC Securities, noted that the entire system has been disturbed by heavy foreign investor outflows, weaker growth prospects, and high crude prices. He explained that the fall in the rupee is ultimately a result of demand and supply dynamics, with higher demand for dollars.
Widening Current Account Deficit
The rupee's decline coincides with a growing current account deficit, driven by costly energy imports. According to estimates from Bank of America Securities, the gap is expected to exceed two percent of GDP this fiscal year, more than double last year’s level. This could be the widest deficit since 2012–2013.
At the same time, foreign investors have withdrawn over $20 billion from Indian stocks since the start of the Mideast conflict, marking the fastest pace of outflows on record. Dollar inflows have slowed, raising concerns about a potential balance-of-payments gap as large as $67–$88 billion.
Economist Dhiraj Nim of ANZ Research mentioned that the 2027 fiscal year will be the third consecutive year of a balance-of-payment deficit, which is unusual. This strain has led the central bank to use foreign exchange reserves to defend the rupee, which are now around $697 billion, down from over $720 billion before the Middle East war.
While still sufficient to cover about 11 months of imports, the decline highlights the pressure on the reserves.
Impact on Domestic Economy
A weaker rupee is affecting various sectors of the domestic economy. Manufacturers and food processors, many of whom rely on imported raw materials priced in dollars, are experiencing increased costs. Smaller firms often lack the capacity to hedge against currency risks.
In Kerala’s cashew industry, which primarily imports raw nuts from Africa, the impact has been particularly severe. Rajmohan Pillai, who runs a cashew firm, stated that imports have become significantly more expensive for the local market. He added that buyers can now afford only about 90% of last year’s volumes.
He estimates that more than 80% of processing units have shut down in recent years, with rupee volatility being a contributing factor.
Challenges for Students and Economic Ambitions
The depreciation of the rupee has also affected students looking to study abroad. Education consultants report that studying in the US now costs over ₹1 million (US$10,450) more compared to a year ago. Meghna Sen, a 17-year-old aspiring psychology student, described this as "the last straw," noting that students now need to track the rupee's movement to manage their grocery budgets.
The currency decline has also impacted India’s ambition to become the world’s third-largest economy. Prime Minister Modi, who once criticized his predecessors for currency weakness, has seen India’s global economic ranking affected because GDP comparisons are measured in dollars. According to IMF data, the country has slipped behind the UK to the sixth position, largely due to the rupee’s fall.
Potential Measures and Future Outlook
Nomura analysts suggest that more drastic measures may be necessary. These could include possible fuel price hikes, tighter controls on overseas remittances, and steps to attract dollar deposits from non-resident Indians—similar to strategies used in past crises.
However, economists caution that intervention can only help smooth volatility, not resolve underlying pressures. Dhiraj Nim emphasized that fundamental factors remain to be addressed, adding that an interest rate hike targeting future inflation cannot be ruled out.
The Reserve Bank of India is aware of its options, but the decision on what actions to take remains to be seen.
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