Let’s get this straight. The Indian Rupee (INR) has not been doing very well for a year. It is down a whopping 5.1% in just the last 3 months against the US Dollar, and more than 11% in the last 12 months. That is a huge depreciation against dollar for a big country like India. Verify data
Most people think that the worst is behind us. The Indian Rupee has already depreciated significantly. Surely, now the Indian Rupee has become undervalued and even attractive for foreign investors to invest their money in India. But I believe that more bad times for the Indian Rupee are on the horizon, and the biggest reason for that is The US-Iran war (West Asia confilct).
Wait, hasn’t the market already discounted the effects of the war? Answer for this would be NO. Let me tell you more about it in this article.
Why is the Indian Rupee falling?
First, let’s talk about why the Indian Rupee is falling so much in the first place, and then we can talk about what’s next and what can be done.
Indian Rupee is falling because of one simple reason. More US Dollars are flowing out of the country than coming in, and there is one big factor that drives the US Dollar flows, and that is India’s current account balance.
The current account balance simply means the difference between how much the country exports and imports. A current account deficit means the country imports more than it exports, and a current account surplus means that a country exports more than it imports.
India has been running a current account deficit for almost forever, which means we import more stuff than we export. So how does the current account balance affect the currency?
The US Dollar is the main currency for now, in which all the global trade happens. If I import something, I have to pay US Dollars for it, and if I export something, I will usually get paid in US Dollars for it. Now, if I am importing, say $100 billion worth of stuff but only exporting $90 billion worth of stuff, then I have a shortfall of around $10 billion. So how do I get these $10 billion?
I will need to go to the foreign exchange market and sell my Indian Rupees in exchange for US Dollars. This increases the supply of the Indian rupee and increases the demand for the US Dollar, leading to the value of the Indian rupee falling against the Dollar.
Under normal circumstances, this causes the Indian Rupee to fall 2-3% on average against the US Dollar every year. That’s fine. It’s not a cause for concern. What is a cause for concern if the Indian rupee falls more than 5% in just 3 months, as it has recently.
So what’s happening here?
The simple answer is that our dependency on crude oil imports is freaking the market out.
India consumes 5.5 million barrels of crude oil every day. Out of this, roughly 90% is imported. For ease of calculation, let’s assume that the number is 5 million barrels per day. Multiply that by 365, and we get 1.825 billion. This means every year, India imports roughly 1.8 billion barrels of oil.
Because we import such a huge amount of crude oil, it is our biggest import. For context, in FY25, we imported $137 billion of crude oil. Although the number would be slightly lower for FY26, as prices were lower before the war. But regardless, any big increase in crude oil prices will also adversely affect India’s current account deficit.
How adversely? Let’s do some calculations.
India’s current account deficit for the first 9 months of FY26 stood at $30.1 billion. Assuming the trend continues, we should expect the current account deficit for the full year to come at $41-42 billion.
India imports 1.8 billion barrels of crude oil every year, which means for every $1 increase in the price of crude oil, our import bill rises by $1.8 billion.
If you exclude March 2026, the crude oil price averaged around $65 for FY26. For FY27, crude oil prices can easily average $100, the reason for which I’ll explain in just a second.
Assuming that crude oil prices stay at $100 for the year, we’ll need to shell out an extra $60-65 billion to import the same amount of oil. And this amount will be directly added to our current account deficit, pushing it higher from the current $40 billion dollars to around $100 billion! That’s a 150% increase!
This is exactly what the foreign exchange market is freaking out about.
Why USDINR at 100 is inevitable
The simple answer: too much damage has been done to the oil market by the current war in the Middle East, so things will take a long time to return to normal.
Since the start of the war, we’ve lost more than 1.5 billion barrels of crude oil supply. Even right now, 11-13 million barrels per day of crude oil supply are offline. This is the biggest oil supply disruption in the history of humanity. Just for some context, before the war, a supply-demand imbalance of just 1 million barrels of crude oil per day would decide if crude oil trades at $60 or $90. And currently, we’re seeing a supply disruption of 11-13 million barrels per day.
The only reason why Oil is still trading at $90 or so is because of existing reserves of crude oil, but they’re being drained at a breakneck speed. Just last week, the US saw the biggest weekly decline ever in total crude oil inventories at 17.78 million barrels. At that pace, their reserves will reach the operational minimum level by July.
Regardless, the point is we’ve lost too much oil supply by now for things to go back to normal, even if the Strait of Hormuz opens today. We’ve reached a point of no return. As soon as the Strait opens again, everybody will rush to secure as much as they can to refill their reserves and make sure they’re prepared if a supply disruption like this happens again. This will keep oil prices elevated at least for the next year and beyond. So, consequently, the much larger current account deficit is also here to stay. This will continue to put pressure on the rupee in the coming months as more and more US Dollars are required by India to fulfil its oil import obligations.
What can the government do
The government has done some things to tackle the currency issues, and the biggest and most substantial one of them is increasing import duties on gold and silver.
After crude oil, gold is India’s second biggest import. We Indians love gold so much that in FY26, we imported $72 billion of the shiny metal. Now, the government has increased the import duty on gold and silver from 6% to 15%. That’s a huge increase, and the only reason for that is to disincentivize people from buying it.
The thing is, India doesn’t produce the gold that it buys. We have to import it, and we have to pay for it in US Dollars. So, if we can reduce our gold imports by, say, 30% for a year or so, then it directly translates into a lower current account deficit by $20 billion or so. And any relief that the government can get right now on that front is most welcome.
Aside from that, the bigger issue is fuel prices. The government takes a huge chunk out of the fuel you pay for in the form of taxes. It then uses those taxes in different welfare and direct benefit schemes, which in turn increase economic growth to some extent. Now, because of higher crude oil prices, fuel costs will increase, and the only reason petrol sells at ₹107/litre is that the government is not passing the higher crude oil cost on to consumers. It is being borne by oil market companies to the tune of 1000+ crores daily. But this cannot continue forever. The government either has to compensate oil companies by reducing their own taxes, or they increase fuel prices further and passes on the cost to consumers. Either way, the cost is a slowdown in economic growth, and that will hurt everyone.
In simple terms, the government has to choose its poison, and there’s no easy way out of this mess.
But there’s another implication of slower economic growth that will make things harder for the rupee, and that is foreign investments. If India’s growth slows down, then the foreign investors who invested in the Indian stock market will start to take their money out. When they take their money out, they’ll exchange their Indian rupee for their local currency. This will further increase the supply of the Indian rupee, which will push it down even lower. This will just add to the pain that the Indian rupee is already facing.
In fact, as of writing this, foreign investors have already cashed out a lot of money from the Indian stock market since the start of the war. In 2025, foreign investors sold ₹3,12,000 crores worth of Indian stocks, but as of 26th May, 2026, they’ve already sold ₹2,69,000 crores worth of stocks. In just the first five months of this year, they’ve already sold almost as much stock as they did in 2025! This is all because of the Indian rupee falling and a not-so-bullish future outlook.
What can you do?
Currency depreciation is not just a phenomenon you see on your mobile screen. It’ll affect almost every part of your life, directly or indirectly. Those international artist tickets will start costing more, the stock market might not perform as well as it should, and more such things will happen.
So how do you protect yourself from the effects of currency depreciation?
First, you can start to invest in international assets. You can invest in the US or European stock markets. This will give you the benefit of equity growth as well as currency depreciation, as your money is invested in US dollars instead of Indian rupees.
Just keep this rule in mind: when you’re investing in a foreign country’s assets, you’re not just being bullish on the asset. You’re also being bullish on the currency.
Second, if you do not have access to international markets, then you can invest in gold. Since we import our gold, gold prices increase because of currency depreciation, too. So, if the rupee weakens by 1% against the Dollar, that 1% gets added to your returns on your gold investment.
Third, invest in heavily export-oriented businesses. These are the businesses that’ll see a big improvement in their financials in the foreseeable future because of currency depreciation. Although, invest in such companies only after thorough research and analysis.
Fourth, stay away from fixed-income instruments. In times of rapid currency depreciation, fixed-income instruments can be a very bad investment vehicle as they may provide very bad real returns.
Conclusion
The situation that India is in right now is a very difficult one to manage because of one sole reason: India’s dependence on oil imports. The pain is inevitable at this point, but what’s important is how the government manages that pain.
Regardless, this whole situation is very dynamic and fluid with a lot of moving parts. So keep an eye out for changes and developments as they happen. Rest assured, I’ll definitely cover any big and substantial changes that happen.
