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Informist, Monday, Mar. 2, 2026

 

By Pratiksha

 

NEW DELHI – Just when the dark clouds of US tariffs were beginning to clear, the rupee is having to deal with a fresh blow in the form of an outbreak of hostilities in West Asia. The Indian currency slumped to a one-month low Monday after Israel and the US launched joint military strikes on Iran over the weekend, prompting retaliation from Tehran. If the conflict escalates and results in a protracted war in the oil-rich region, market participants expect the rupee to depreciate sharply in the near- to medium-term.

 

"RBI (Reserve Bank of India) will do their bit for the currency, but if the momentum of the conflict continues like this, there is very (little) that anybody can do," Anshul Chandak, head of treasury at RBL Bank, said. "For now, it is very tough to gauge what will come out of this. Overall it is very bad for Indian macro (economy). If it doesn't settle down in the next few days, I think it can be very damaging."

 

Market participants expect the rupee to fall beyond 92.00 per dollar this week if the hostilities escalate. Most expect the rupee to trade in a range of 91.00-93.00 a dollar in the near term and fall to around 95.00 by the end of 2026. The Indian unit had fallen to a lifetime low of 91.9950 on Jan. 30.

 

Iran's supreme leader, Ayatollah Ali Hosseini Khamenei, and several of the country's top military leaders were killed in the first wave of attacks by Israel and the US Saturday. Iran has since retaliated against Israel and also targeted US military installations around the Persian Gulf region. Iran has also shut the Strait of Hormuz, a narrow waterway that connects the Persian Gulf with the Indian Ocean, resulting in a jump in crude oil and natural gas prices. A fifth of global crude oil supply flows through the Strait of Hormuz. About half of India's crude oil imports--primarily from Iraq, Saudi Arabia, the United Arab Emirates, and Kuwait--also pass through the strait, making the country particularly vulnerable to shipping bottlenecks and surging freight and insurance rates.

 

Given this scenario and the country's heavy dependence on imports of crude oil, the stakes are high for India and for its currency. Crude oil imports may become costlier by the day if the conflict in West Asia escalates. Brent crude oil price surged over 7% Monday and hit an over-six-week high of $82.37 per barrel in early trade. At 1505 IST, it was at $79 per barrel. If the upward trajectory continues, India will be staring at a much higher current account deficit, a sharp rise in inflation, and lower GDP growth.

 

In Asia, Thailand, India, Korea, and the Philippines are the most vulnerable to higher oil prices due to their high import dependence, according to Nomura. "In India, we expect a higher import bill and risk-aversion driven portfolio outflows to increase BOP (balance of payments) funding pressure in the near term, while higher oil prices will reinforce the RBI's on-hold stance and can add to fiscal risks," it said in a note. 

 

Market participants also flagged the risk of foreign portfolio outflows resuming in view of the worsening situation in West Asia. This may exert more downward pressure on the domestic currency. FPI inflows into India had only revived last month after India and the US announced a trade deal under which Washington cut tariffs on Indian goods to 18% from 50%. FPIs infused $3.58 billion into the Indian markets in February after recording net outflows in the previous two months. In 2025, FPIs withdrew $10.92 billion from the domestic market on a net basis, the most in three years.

 

"Capital flows were anyway a challenge for India and this development only makes our case worse," Dhiraj Nim, foreign exchange strategist at ANZ Bank India, said. "My base case for rupee was at 93.00 by year-end, but if the conflict continues, we may see 95.00."

 

Amidst all this, market participants expect the RBI to keep a lid on volatility by intervening through dollar sales. Case in point: the rupee fell only 0.5% against the dollar Monday. The fall of the Indian unit was limited as the RBI likely intervened through dollar sales in the spot market.

 

However, most dealers don't expect the central bank to aggressively defend the rupee at a time when most of its Asian peers are also weakening. A fall will also ensure trade competitiveness. Other Asian currencies fell 0.3-1.3% against the greenback Monday, with the Thai baht and South Korean won being the worst hit.

 

"The RBI has the capacity to intervene. There are enough reserves. However, it is the willingness to intervene at such times, which is the big question," Nim said. India's foreign exchange reserves were at $723.61 billion in the week ended Feb. 20. 

 

The currency market is currently not fully pricing in a further escalation in the conflict between Iran and the US and its ally, Israel. In case the hostilities settle down, they expect the domestic currency to move back above 91.00 in the near term. "The market has behaved reasonably so far. I don't think there is any panic as of now, but a lot depends on how crude behaves from here," Alok Singh, treasury head at CSB Bank, said. 

The next few days will be crucial for the currency market as it gauges the evolving situation. Given the avalanche that hit the world over the weekend, the reverberations may last for some time.  End

 

US$1 = INR 91.47

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Rajeev Pai

 

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