India Struggles to Stabilize Rupee Amid Oil Crisis

India is facing a significant challenge as the rupee continues to decline, driven by rising oil prices linked to the conflict in the Middle East. This situation threatens to disrupt the world's fastest-growing major economy, with the currency losing more than five percent since the crisis began in February. The depreciation has extended losses from 2025 and made the rupee Asia's worst-performing major currency in 2026 so far.

The rupee hit a record low of over 96 to the dollar on Friday, prompting officials to emphasize that halting further depreciation is a key macroeconomic priority. To address this, India's central bank has taken several measures, including injecting billions of dollars into the market to stabilize the currency, curbing speculative trading, and offering a special credit line to oil importers to ease the demand for dollars.

Prime Minister Narendra Modi has also called for voluntary austerity measures to control dollar-guzzling imports, such as reducing gold purchases and limiting foreign travel for a year. However, despite these efforts, the pressure on the rupee remains high.

"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. He noted that the depreciation is ultimately a function of demand and supply, with higher dollar demand being the main issue.

The rupee's decline comes amid a widening current account deficit, driven by costly energy imports. According to estimates from Bank of America Securities, the gap is likely to exceed two percent of GDP this fiscal year, more than double last year's level and potentially the widest since 2012–13.

At the same time, foreign investors have dumped more than $20 billion in Indian stocks since the start of the Mideast conflict, marking the fastest pace on record. Dollar inflows have slowed, increasing 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 CryptoLiveDaily. This strain has weighed on the rupee, prompting the central bank to defend it by using 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 highlights the pressure on the economy.

A weaker rupee is having a ripple effect across the domestic economy. Manufacturers and food processors, many of whom depend on imported raw materials priced in dollars, are experiencing surging costs. Smaller firms often lack the ability to hedge against currency risks.

In Kerala's cashew industry, which mostly imports raw nuts from Africa, the impact has been severe. "Imports have become far more expensive for the local market," said Rajmohan Pillai, who runs a cashew firm. He added that buyers can now afford only about 90 percent of last year's volumes. He estimates that more than 80 percent of processing units have shut in recent years, with rupee volatility being a contributing factor.

• 'Last straw' -

India's currency decline has also affected students looking to study abroad. Education consultants report that studying in the United States now costs more than one million rupees ($10,450) extra compared with a year ago. "This is the last straw," said Meghna Sen, a 17-year-old aspiring psychology student. "Now we have to track (the rupee) movement to check how much we need for our grocery budgets."

The depreciation has also impacted India's ambition to become the world's third-largest economy. Modi, who once criticized his predecessors over currency weakness, has seen India's global economic ranking dented because GDP comparisons are measured in dollars. The country has slipped behind the United Kingdom to the sixth place according to IMF data, largely due to the rupee's fall.

Nomura analysts warn 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—a strategy used in past crises. However, economists caution that intervention can only smooth volatility, not reverse underlying pressures.

"Fundamental factors" remain to be resolved, Nim said, adding, "I would not even rule out an interest rate hike which squarely targets future inflation." The Reserve Bank of India knows what its options are, he said. "All that remains is to see what it decides to choose."