Rupee on a roller coaster

A weak rupee is becoming the new normal. A twoweek ceasefire in the war with Iran, announced by US president Donald Trump on April 8, coupled with an earlier unorthodox intervention by the Reserve Bank of India, may have stemmed the currency’s free fall, steadying it near 92.5 to the dollar, but its recent decline—even before the conflict—has raised concerns. The rupee had earlier slid past 95 on March 30—a record low—sending tremors through the economy, with forecasts of a fall to 100 or beyond, as the war entered its second month.

Meanwhile, on April 8, RBI governor Sanjay Malhotra said that the war “poses an unprecedented challenge for the global economy—higher prices and slower growth”, as the Monetary Policy Committee (MPC) kept interest rates unchanged amid concerns over rising inflation. Much of that inflationary risk is transmitted through a weakening currency. A weaker rupee raises import costs for a country that relies on imports for 85 per cent of its crude oil, nearly 60 per cent of its natural gas and 15 per cent of its urea requirement, widening the Current Account Deficit (CAD), when imports exceed exports. While exporters stand to gain from the depreciation, consumers pay higher prices for goods with high imported content, including airconditioners, smartphones and automobiles. Foreign travel and vacations become costlier too, as does education at overseas universities.

RBI’S GAMBIT

What made the rupee’s slide more concerning was that it breached 95 to a dollar despite the RBI’s move to shore it up. On March 27, the central bank capped the net open positions of banks in the onshore forex market at $100 million (Rs 930 crore) at the end of each business day, aiming to curb speculation and stabilise the currency. Earlier, lenders could run net open positions of up to 25 per cent of their net worth, with large banks often accumulating sizeable long dollar bets—sometimes exceeding $1 billion (Rs 9,300 crore)—on expectations of further depreciation. With the new cap in place, banks have had to unwind these positions, cutting exposures to $100 million, effectively forcing them to sell dollars and buy rupees.

The RBI’s move eventually delivered results. On April 6, the rupee posted its sharpest rally in 12 years, strengthening to 93 to a dollar. The response, however, was not immediate. The currency initially firmed after the announcement but soon gave up those gains as uncertainty gripped global commodity and financial markets. The trigger was Trump’s threats to “obliterate” Iran’s electricity facilities, days after announcing a 10-day halt on strikes on the country’s infrastructure.

The RBI intervention also reflects its shrinking room to defend the rupee. Traditionally, it strengthens the currency by selling dollars from its foreign exchange reserves, but those buffers have been declining. India’s forex reserves dropped by $11.4 billion (Rs 1 lakh crore) to $698.4 billion (Rs 65 lakh crore) in the week ended March 20, driven by a sharp decrease in gold reserves. Forex reserves had touched an all-time high of $728.5 billion (Rs 68 lakh crore) in the week ended February 27, just before the West Asia conflict began. “The $700 billion-plus [as of February] external reserve, we believe, is sufficiently strong to deter speculative moves by intervening in the foreign exchange market to prop up the rupee,” says a research note from the State Bank of India. “There is no reason to suggest that we should use forex reserves for rainy days only and we believe there is still time to intervene in the market to prop up the rupee if it is so desirable.” In an interview with india today last December, Malhotra had said that the central bank had a policy not to target any level for the rupee and would “let market forces determine what the appropriate level of the rupee should be”. The policy, which the MPC reiterated on April 8, seemed aimed at supporting exporters facing uncertainty from Trump’s reciprocal tariffs.

REPO RATE

The MPC kept key interest rates unchanged at 5.25 per cent, citing inflation risks from the developments in West Asia. However, there was a clear shift from the “Goldilocks economy” situation, marked by high growth and low inflation in the February MPC meeting, to a “risk-aware economy”. The benign inflation outlook of 2.1 per cent has risen to a riskier 4.6 per cent, while the growth outlook has moderated from 7.4 per cent to 6.9 per cent.

The RBI is by no means adopting a “wait-and-watch” approach to macro trends. It will see how the oil supplies from the Strait of Hormuz ease, and how real are chances for peace. Both will cool down prices of the dollar and oil. Early forecasts flag El Nio risks, which could disrupt rainfall patterns, pressure food prices and complicate the inflation outlook. “The global environment remains highly uncertain and fluid,” Malhotra said, acknowledging that the risks confronting India were no longer purely domestic. Policy, he added, would remain “nimble and agile”. Perhaps most telling was his emphasis on ensuring an “orderly evolution of the macroeconomic environment”, which signals a shift from traditional rate-setting to active management of volatility.

For much of the past decade, India’s monetary policy had been anchored in domestic cycles. Now, the pressures shaping the country’s macroeconomic trajectory are increasingly external, driven by oil prices, currency movements and capital flows that respond as much to geopolitics as to fundamentals. The April 8 RBI decision reflects an adjustment to that shift, with the rupee at the frontline. For instance, every $10 rise in crude prices can add roughly 0.3-0.4 percentage points to inflation and widen the CAD by close to 0.4-0.5 per cent of GDP. Allow the currency to slide too quickly, and inflation risks escalate. Hold it artificially strong, and reserves begin to erode while export competitiveness suffers.

BALANCING ACT

What sets India apart at this moment is that the RBI is attempting a balance that few large economies are trying to maintain simultaneously. In Japan, the yen has weakened beyond 150 to the dollar, with policy makers largely tolerating depreciation to support exports and growth. In China, the yuan has been tightly managed within a narrow band, aided by capital controls and daily fixing mechanisms. In Europe, central banks have remained singularly focused on inflation, keeping policy rates elevated even as growth softens. India, by contrast, needs to manage currency volatility without exhausting reserves, contain inflation that is increasingly imported, and sustain growth that, while still strong by global standards, is moderating.

Malhotra acknowledged this balancing act, saying: “Our endeavour is to maintain a fine balance between growth and price stability.” Pinaki Chakraborty, former director of the National Institute of Public Finance and Policy, says that given the fear of inflation and slower growth due to the emerging global crisis, the RBI has decided not to change the rate. Another economist, who did not wish to be named, points to a deeper shift, noting that the central bank is increasingly relying on “liquidity and forex management as the first line of defence”, with the policy rate playing a more limited, signalling role. “Thankfully, the RBI has large foreign exchange reserves which give a sense of economic security to India. Those who always think the RBI is holding more reserves must rethink now,” says Chakraborty.

Even before the West Asia war, the rupee was weakening due to higher dollar outflows from Foreign Portfolio Investors (FPIs), a widening trade deficit amid slowing export growth, and uncertainty over trade with the US after Trump’s tariffs along with penalties for buying Russian oil. The war has aggravated the situation. The rupee has tumbled 8.2 per cent over the past year, making it Asia’s worst-performing currency.

The war has pushed oil prices to their highest levels since the 2022 Ukraine conflict, triggered severe shortages of natural gas for commercial purposes and cooking fuel, and intensified risks after Iran targeted energy facilities in Gulf Cooperation Council (GCC) countries. Rising tensions have driven investors towards the safe-haven US dollar. FPIs pulled out Rs 1.14 lakh crore from Indian equities in March—the highest monthly outflow on record—amid West Asia tensions, a weakening rupee and high crude prices. On March 30, the benchmark BSE Sensex dropped 1,635.67 points, or 2.2 per cent. It remained volatile over the next few days before surging more than 2,900 points (4 per cent) on April 8, after the ceasefire announcement. Meanwhile, Brent crude dropped more than 14 per cent to $96.5 a barrel. Expensive oil would have had a cascading effect across sectors, driving up consumer prices.

For now, the rupee appears on firmer ground, but any further geopolitical uncertainty could send it tumbling down once again.