India’s currency stability is facing fresh challenges as surging oil prices and external pressures limit the effectiveness of central bank interventions.
The Reserve Bank of India recently moved to curb speculation in the foreign exchange market by capping banks’ open positions. The step briefly lifted the rupee, which rose as much as 1.4% at Monday’s open. However, the gains were short-lived, with the currency reversing to close at a record low of 94.8325 per dollar, making it Asia’s worst-performing currency this year.
The core issue lies beyond market speculation. India’s heavy reliance on oil imports is increasing pressure on the current account deficit, especially as the Iran war continues to push global crude prices higher. As the world’s third-largest crude importer, rising oil costs are driving higher outflows of foreign exchange.
At the same time, inflows may weaken. Remittances from nearly 10 million Indians working in Gulf countries are expected to decline, further tightening the country’s external balance.
“The problem is the pressure on the rupee is not just from speculators it comes from the real demand for dollars in the economy,” Abbas Keshvani, Asia Macro Strategy Director at RBC Capital Markets, said. “Even before all of this kicked off in the Middle East, India had a very wide trade deficit and that deficit is going to widen.”
India’s current account deficit, estimated at about 1% of GDP for the fiscal year ending March, could expand to 2.5% in the next fiscal year, according to Standard Chartered. Nomura estimates that every 10% increase in oil prices could widen the deficit by around 0.4% of GDP.
Under a worst-case scenario, Bloomberg Economics’ Abhishek Gupta estimates oil prices could average $125 through the fiscal year ending March 2027. This could push India’s balance of payments deficit beyond $130 billion, compared to an earlier expected surplus of $10 billion.
India recorded a balance of payments surplus of $63.7 billion in fiscal 2024 and a deficit of $5 billion in fiscal 2025. Economists warn that the country could face a deficit for the 2nd consecutive year—an unprecedented situation—with risks of a 3rd year of deficit rising.
“India’s balance of payment will be in deficit for the second successive year in this financial year — which has never happened before,” said Anubhuti Sahay of Standard Chartered.
Adding to concerns, foreign investors may pull capital from emerging markets, potentially leading to a capital account deficit. “This has never happened since 1991,” said Soumya Kanti Ghosh of State Bank of India.
Rising crude prices are also impacting growth projections. Goldman Sachs has cut India’s 2026 growth forecast to 5.9%, down from an earlier estimate of 6.5%.
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