The Rupee’s depreciation to ₹95 against the US dollar in March 2026 marked a significant event – it also increased attention on deeper structural pressures within the Indian economy. Though increasing crude oil prices from the Iranian conflict served as an immediate trigger for the Rupee’s decline, the speed and magnitude of this move further indicate the extent of structural weaknesses within India’s financial markets and capital position.
Rupee depreciation will have direct consequences for India’s economy considering the fact that over 90% of the nation’s oil is imported, i.e., a depreciation of the rupee can lead to increased prices for crude oil, regardless of whether crude oil prices remain constant at the global level.
Oil shock and capital outflows intensified pressure on the rupee
This will have direct implications on domestic fuel prices and transportation costs and ultimately, inflation across many sectors. Thus, the rupee not only acts as a financial benchmark but also correlates highly to a household’s price of living.
Further, both the Iranian conflict, resulting in high crude oil prices (over $110 per barrel) together with significant capital outflows as foreign investors began selling their Indian equity holdings and exchanging rupees for US dollars have created a perfect storm for the rupee due to simultaneous pressures on both India’s trade and financial account components.
The rapid deterioration of the Indian Rupee is not simply attributed to external forces but also stems from Indian currency markets’ structural problems. Domestic currency trading occurs in a regulated on-shore market and an unregulated off-shore market. Both markets cause the Reserve Bank of India (RBI) difficulty in controlling the value of the Rupee.
The offshore market created a gap the RBI struggled to control
The on-shore exchange rate is subject to RBI supervision and intervention to support its value. The off-shore (non-deliverable forward [NDF]) market for the Rupee is located outside India in financial centres like Singapore and London and allows speculators to speculate on the currency without physically holding it.
The Rupee is typically subject to less pessimistic sentiment in the on-shore market than in the off-shore market. This pricing gap has enabled market participants, particularly large banks with access to both markets, to engage in arbitrage by purchasing Dollars used to buy Rupees at shallow prices in the on-shore market and selling them at a higher price in the off-shore market.
As these trades grew rapidly into the tens of billions of dollars, arbitrage helped to align prices; however, the intervention by the RBI has resulted in banks holding currency exposure in geographical places where they aren’t actually trading. Each time the RBI sold dollars to help to support and stabilize the rupee, a portion of that intervention is absorbed into the offshore speculative positions.
RBI intervention and unintended consequences
The RBI tightened banks restrictions on their currency exposure, and then imposed restrictions on banks from offering offshore derivative contracts, forcing the banks to liquidate their positions. This led to a temporary strengthening of the rupee; however, the liquidation created dynamic changes.
When banks closed out their trades, corporations moved in to exploit the same arbitrage opportunities. This increased the demand for dollars in the onshore market, further pushing the rupee down, which resulted in the rupee reaching its lowest level on record. The central bank took further measures to close off these channels by tightening its restrictions on the banking community.
While these measures helped to stabilise the rupee temporarily, the root causes of the rupee being under pressure were due to high oil prices and continued capital outflows.
What this means for India’s economic outlook
This incident illustrates the fact that to manage a currency in an integrated global economy requires great complexity. Even with adequate foreign reserves, there is still a limit to how effectively central banks can control pressures caused by market forces.
In addition to being a reflection of temporary volatility, the decline of the rupee also demonstrates that external shocks and the internal structure of the market can add to the level of risk in India’s economy. While regulatory interventions may provide temporary solutions to currency volatility, address the underlying issues of energy dependence and capital flow dynamics will be essential for ensuring a long-term equilibrium.
As of now, the rupee is now stable, after having fluctuated to its lowest point. But the pressures that caused it to decline remain, therefore ongoing currency volatility is likely to be a significant obstacle to long-term stability in the Indian economy.
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