The Indian rupee is facing a major challenge recently, falling below the 95 mark against the US dollar despite the Reserve Bank of India’s (RBI) best efforts to stabilize the currency. With geopolitical tensions rising in West Asia, foreign institutional investor (FII) selling, and high oil prices, the RBI may need to take further measures to prevent the rupee from falling further.
The rupee has lost 10 percent in FY 2025-26, its biggest annual fall in over a decade. While currency volatility is a regular feature in global markets, the rapid fall of the rupee in recent weeks is a matter of concern for all, including policymakers, economists, and market players.
Why the Rupee is Under Pressure
Several factors have contributed to the decline of the rupee this financial year.
One of the main factors is the geopolitical tensions in West Asia, which have led to an increase in crude oil prices. India imports more than 80% of its crude oil requirements, and hence an increase in crude oil prices would lead to an increase in its import bill, thus leading to an increase in demand for dollars, hence impacting the rupee.
Another reason for the decline of the rupee is the continued selling of Indian stocks by foreign portfolio investors. FPIs have continued to sell Indian stocks at a rapid rate this financial year. In fact, according to NSDL data, FPIs have sold over ₹1.80 lakh crore worth of Indian equities in FY26, followed by an outflow of ₹1.27 lakh crore in FY25.
Moreover, global trade tensions and the increased tariffs imposed by the United States last year have added pressure to the Indian rupee.
Initial Measures Taken by RBI
The RBI has taken some measures to curb this volatility in the Indian rupee. Recently, RBI directed banks to cap their open rupee positions at $100 million.
This measure was effective for the Indian rupee, and it even appreciated marginally. However, it again began its downward journey.
Economists Call for Targeted Intervention
Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, opines that there is still scope for intervention by the Reserve Bank of India. This is because India has foreign exchange reserves worth $700 billion, which can be used to protect the rupee from speculative attacks.
In his opinion, the Reserve Bank of India should not hesitate to use its foreign exchange reserves if needed to protect the rupee.
One such solution, he said, could be a special window for oil marketing companies to borrow dollars. The oil marketing companies together need $250-300 million every day in terms of dollar demand to meet oil imports. This demand, if channeled through a special window provided by the Reserve Bank of India and not through the open market, could ease the rupee pressure to a large extent.
Lessons from 2013 Currency Crisis
India had faced a similar currency crisis in 2013 when the rupee had plummeted from 54 to 68 per dollar in a span of over three months following indications from the US Federal Reserve on its plan to withdraw its quantitative easing policy.
In 2013, the Reserve Bank of India had introduced a slew of emergency measures, including a special window for oil companies and a concessional swap facility for banks to raise foreign currency non-resident deposits, to stabilize the rupee. The measures attracted close to $34 billion, helping to stabilize the rupee.
However, economic experts argue that the current economic environment is different from the one in 2013. As a result, while lessons can be learned from the past, the new situation would need to be handled in a unique manner.
The Role of Global Factors
Global investment bank MUFG has indicated that the rupee may continue to experience pressure in the coming medium term due to global factors. According to the investment bank, the ongoing conflict in West Asia may lead to an increase in oil costs, which would, in turn, lead to inflation in the country.
Apart from the oil price, the conflict in the region may also lead to economic consequences, including an increase in the costs of fertilizers, food, travel, and trade, particularly with the Middle East.
These factors are likely to continue affecting the rupee unless the country attracts more capital inflows from foreign investors.
What Happens Next?
Despite the rupee losing value in the recent past, economic experts are of the opinion that the macroeconomic environment in the country is strong compared to other emerging markets in the world.
For instance, the country has strong forex reserves, a strong economy, and a stable banking system, which would enable the country to withstand the current economic challenges.
However, in the coming days, the RBI may need to introduce new interventions, including the creation of a special window for oil companies, in an attempt to prevent currency volatility from becoming a threat to the economy.
However, the RBI would need to ensure the right balance in the coming days, considering the global economic uncertainties, in an attempt to ensure the rupee regains its position in the coming months.
