06/05/2026 04:38 AST
The Indian rupee plunged to a record low on Tuesday, breaching 95 against the US dollar and sliding close to the 26-mark against the UAE dirham, as surging oil prices and escalating Gulf tensions intensified pressure on India's external balances and investor sentiment.
The sharp decline underscores the currency's vulnerability to the ongoing crisis in the Gulf, where disruptions around the Strait of Hormuz have driven crude prices to near $113-$115 a barrel. For India - heavily dependent on imported energy - the spike is rapidly worsening trade dynamics and fuelling inflation concerns, triggering a fresh wave of selling in the rupee.
The currency has now weakened about 4.5 per cent since the outbreak of the US-Iran conflict in late February, broadly mirroring declines across other Asian currencies of oil-importing nations.
"The underlying issue for the rupee remains the balance of payments. Measures to increase capital flows need to be the key policy priority," analysts at UBS said in a recent note, revising their year-end forecast for the currency to 96 per dollar from an earlier 94.
The pressure is structural as much as cyclical. Higher oil prices are expected to widen India's current account deficit, while tighter global financial conditions and geopolitical uncertainty are weighing on foreign capital inflows - a critical support for the rupee.
Analysts at ANZ struck a similarly cautious tone, projecting the rupee could weaken further to around 98 per dollar by early 2027. "While the RBI can keep intervening to smooth volatility, it is unlikely to offset the adverse balance of payments dynamics that have anchored expectations of continued INR weakness," the bank said.
The Reserve Bank of India has already stepped up intervention in both spot and forward markets to contain excessive volatility. Traders reported dollar sales by state-run banks near the 95.40 level on Tuesday, widely seen as a move by the central bank.
However, defending the currency is becoming increasingly costly. India's foreign exchange reserves have come under pressure, while the RBI's forward dollar commitments have surged beyond $100 billion, reflecting sustained efforts to stabilise the rupee.
"The RBI can smooth volatility, but it cannot reverse the fundamental pressure from oil and capital flows," said a Mumbai-based currency strategist, noting that the rupee's trajectory is now closely tied to developments in global energy markets.
In response, policymakers are exploring fresh measures to boost dollar inflows. Options under consideration include reviving special deposit schemes for non-resident Indians - similar to those deployed during the 2013 taper episode - and easing tax rules for foreign bond investors.
Economists say such steps could provide near-term relief, but sustained stability will depend on a cooling in oil prices and easing geopolitical risks.
The rupee's weakness is also reverberating across financial markets. India's benchmark Nifty 50 index slipped, while bond yields edged higher amid rising inflation concerns and expectations of tighter monetary conditions.
Across Asia, other oil-sensitive currencies, such as the Indonesian rupiah and the Philippine peso, have also weakened, reflecting the broader regional impact of the energy shock.
For Indian expatriates in the GCC, the rupee's plunge boosts remittance value in the short term. However, analysts caution that the underlying macroeconomic stress - including rising import costs and inflation - could weigh on India's growth outlook if the trend persists.
With oil prices elevated and Gulf tensions showing little sign of easing, the rupee is expected to remain under pressure in the near term. Any prolonged disruption in Hormuz - a vital artery for global oil supplies - could further widen India's external deficit, keeping depreciation risks firmly in play.
Khaleej Times
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