Explained: Rupee Free Fall Amid Geopolitical Stress - Causes, Concern, And Way Forward
Rupee has been losing value due to increased capital outflows and oil-triggered demand for USD has dominated India’s trade gains between February and April 2026 - Writes Prof. M. Venkateshwarrlu.
Published : May 11, 2026 at 3:30 PM IST
The Indian Rupee slithered from Rs 83.85 to Rs 95.40 against the US Dollar between 1 May 2025 and 8 May 2026. An almost 13.77% decline over the past 12 months is steep for a growing economy like India, raising concerns among investors, business circles, regulators and the government.
There have been no major or abrupt shocks to the Indian economy's macroeconomic fundamentals over the past year that would have adversely affected the Indian rupee. However, the rupee has been considered Asia’s worst-performing currency, particularly between March and April 2026. This can be credited to multiple international and domestic factors that are responsible for the current scenario.
In July 2025 alone, the rupee depreciated by 2.7% due to renewed trade-related uncertainties and tariff concerns triggered by the United States. The rupee's fall in July 2025 was primarily due to weakened investor confidence, prompting foreign capital outflows from Indian capital Markets. Sudden capital outflows increased demand for dollars as foreign institutional investors converted rupees into USD, driving the rupee lower.
In general, India’s domestic interest rates were always higher than the US Federal Reserve rate, theoretically supporting the rupee's appeal to foreign capital. At current interest rates, the gap is 75 basis points; i.e., Indian interest rates are 0.75% higher than those in the United States. Though there has been a favourable interest rate differential, the rupee has not gained strength as expected, as crude oil prices, trade dynamics, and geopolitical risks have dominated rupee movements in 2026.
The ongoing conflict between Iran and the United States dragged the rupee by 5.35% over 60 days, from late February to late April 2026. As a result, the rupee also experienced unprecedented volatility, reflecting the risk of sudden weakening despite the Reserve Bank of India’s effective monitoring and need-based, timely interventions.
Escalating tensions in the Middle East, due to the United States and Israel’s continued attacks on Iran, have increased geopolitical risk premiums on crude oil. Typically, energy markets factor in potential supply chain disruptions from increased tensions around the Strait of Hormuz, an important, unavoidable chokepoint through which almost 15-20% of the world's crude oil flows. Therefore, any threat to cargo movement or a blockade of this strait pushes prices upward as traders sense the risk of a supply decline.
Crude oil prices remained stable, ranging from $58.35 to $60 per barrel between May and December 2025. The onset of conflict between Iran and the United States in late February 2026 pushed crude oil prices to $108 per barrel in April 2026, an 85% increase, and they have since hovered between $85 and $100 per barrel.
India was not prepared for such a steep increase in crude oil prices and the resulting shortage. India’s crude oil import value was approximately $180 to $ 185 billion in the financial year 2025-26. However, crude oil imports from April to December 2025 totalled only $90.7 billion, a net 12% decrease from the same period in 2024. The increase in crude oil imports from $90.7 billion to $185 was primarily due to higher crude oil prices between January and April 2026. Thus, crude oil prices above $100 per barrel led to a net increase in dollar outflows of approximately $8-$9 billion per month.
Thus, the increased outflow led to an unprecedented fall in the rupee. Likewise, any increase in crude oil consumption significantly raises India’s import bill, as it is not self-sufficient and relies heavily on imported oil, particularly from the Middle East. To pay for these imports, India needs to buy more US dollars, and the increased demand for dollars puts pressure on the rupee.
India meets around 80% to 90% of its energy requirements through the import of crude oil and gas. Even a moderate increase in the energy prices would have a direct impact on India’s import bill, trade deficit, and cost structures. Raising domestic fuel and gas prices would exert upward pressure on inflation by increasing logistics costs, which would be passed on to end customers, thereby raising consumer prices. India witnessed a moderate decline in retail inflation, with the annual Consumer Price Index (CPI) remaining below the Reserve Bank of India’s 4% target for more than a year, from 2024 to 2025. Inflation dropped to 1.7% by December 2025 and then suddenly increased to 3.81% between February and April 2026.
At the end of 2025, India’s trade deficit was under pressure. In January 2026, it had risen to $34.68 billion, almost double the trade deficit a year ago. This surge in the trade deficit was largely driven by strong demand for gold and silver. Surprisingly, the trade deficit decreased sharply to $20.67 billion by the end of March 2026, the lowest since June 2025. The oil and gas shipments were severely hampered by the conflict and the closure of the Strait of Hormuz, yet exports increased to $38.92 billion. Thus, it offset the decline in trade with the Middle East and the increase in exports to the United States. The period of turmoil and growing trade imbalances ended with a remarkable and unexpected realignment in India’s external trade dynamics.
The unexpected favourable trade balance should have had a positive impact on the falling rupee. On the contrary, the rupee has been losing value due to increased capital outflows, while the dollar is gaining strength globally, and oil-triggered demand for the U.S. dollar has dominated India’s trade gains between February and April 2026.
The Reserve Bank of India (RBI) has been cautious since the beginning of the Iran-US conflict to minimise the adverse impact on the rupee and the economy. At times, the RBI intervened to stabilise the exchange rate between the US dollar and the rupee amid this external pressure; a consistent rise in crude oil prices continued to put pressure on macroeconomic fundamentals.
The aftermath of global unrest and the weakening rupee also led to a slowdown in industrial activity, with industrial production reaching a five-month low of 4.1% in March 2026. The GDP growth estimates have been revised downward to 6.3% from earlier estimates of 7.5%, due to war-related disruptions impacting trade and rising crude oil prices, thereby disrupting the economic recovery. The compounding effects of higher import costs, rising inflation, and a weakening rupee complicated the country's monetary policy and fiscal balance.
India is a net-importing country because it imports more goods and services than it exports. As a result, India has consistently maintained a moderate trade deficit. Despite favourable conditions in external trade (excluding crude oil) and interest rate dynamics, the rupee continued to weaken due to India’s oil dependency and rising oil prices. Thus, the rupee is highly sensitive to oil prices, because half of India’s trade deficit occurs in stressed times and one-third in normal times, making oil prices one of the most important drivers of a weak rupee.
For India to be a strong player in global currency markets and for the rupee to be accepted as a global currency, India should build an economy that is naturally self-sufficient and reduce import dependency at all times. That is possible only if India becomes a stronger economy, not just a bigger economy. The Indian economy, which is growing in size, is typically driven by consumption. But India becoming stronger is possible only by structurally reducing import dependence, expanding export capacity, and consistently attracting stable, long-term capital inflows to ensure a strong rupee at all times.
Disclaimer: The writer is a professor at Indian Institute of Management, Mumbai. The opinions expressed in this article are those of the writer. The facts and opinions expressed here do not reflect the views of ETV Bharat or Indian Institute of Management Mumbai.
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