The Indian rupee has been under sustained selling pressure in recent months, caught between a confluence of external shocks and domestic vulnerabilities that have tested the Reserve Bank of India’s tolerance for currency weakness.
The dominant driver has been the energy price shock flowing from the closure of the Strait of Hormuz following the US-Israeli strikes on Iran in late February. India is among the world’s most energy-import dependent major economies, sourcing the vast majority of its crude oil from overseas, with Middle Eastern suppliers historically accounting for a significant share of that intake. The disruption to Hormuz has both reduced the volume of available supply and pushed prices sharply higher, widening India’s import bill and putting direct pressure on the current account. A deteriorating current account is one of the most reliable sources of structural currency weakness, as it reflects a sustained excess of foreign exchange outflows over inflows.
The dollar’s broader behaviour has compounded the problem. In periods of geopolitical stress and elevated energy prices, the US dollar tends to strengthen against emerging market currencies as investors reduce risk exposure and seek the safety of dollar-denominated assets. That dynamic has played out across the Asian currency complex since the Hormuz closure, with the rupee, the Indonesian rupiah and other regional units all feeling the pressure of a firmer dollar environment. India’s relatively high inflation, partly a function of elevated fuel and food costs, erodes the real return on rupee-denominated assets and reduces their attractiveness to foreign portfolio investors.
Capital flow dynamics have added a further layer of fragility. Foreign institutional investors have at times reduced exposure to Indian equity and debt markets during periods of global risk aversion, generating additional dollar demand as they repatriate funds. India’s equity market, while resilient over the longer term, is sensitive to shifts in global sentiment, and sustained outflows create a mechanical source of rupee selling that the RBI must weigh against its foreign exchange reserves.
Structural factors also play a role. India’s trade deficit has historically been wide, reflecting the country’s dependence on energy and electronics imports, and any external shock that pushes commodity prices higher tends to widen that deficit quickly. Gold imports, another perennial drain on the current account, remain elevated as domestic investors seek inflation hedges.
Against that backdrop, the RBI’s decision to intervene signals that the central bank regards the pace of depreciation as disorderly rather than simply reflecting fundamentals, and is prepared to deploy reserves to restore stability
