The Indian rupee hit a historic low of 96.96 against the US dollar on Wednesday. It has weakened over 6 percent since the Gulf war began on February 28, lost nearly 7.8 percent so far in 2026 and about 13 percent year-on-year. Worse, markets have priced in 100 a dollar this year, with economists like Gita Gopinath preferring to let the rupee find its own level. Arvind Panagariya, chairman of the 16th Finance Commission, even urged the RBI to not let the rupee depreciation determine its policy response, whatever the level. Others have made the case for a rate hike to defend the rupee and prevent an inflationary build-up. But the very idea of a rate hike has spooked the bond markets, with the 10-year yield firming up 4 basis points to 7.11 percent on Thursday. Although higher rates can attract foreign capital as the interest rate differential between the US and India widens, that gap is near a decadal low right now.
One reason for the weakening rupee is costlier oil imports. With the benchmark crude touching $110-120 a barrel, India’s import bill is now pegged in excess of $240 billion this fiscal, as against roughly $160 billion in the previous fiscal. As prices remains volatile, some fear India may be staring at an oil-driven stagflationary snarl-up regardless of whether prices and supply shortages are short-lived or not. They insist that the right response is to hike rates. But others reason that more than volatile prices, persistent foreign capital outflows is weakening the rupee. For the first time since record-keeping began in 1998-99, foreign portfolio investors were net sellers of Indian equities for two consecutive years.
Traditionally, the RBI sells dollars to stem the rupee’s slide. Since the start of the war, it has sold over $38 billion and has another $623 billion of usable reserves. But depleting forex would make the exchange rate vulnerable to external shocks. That’s why the central bank announced a $5-billion rupee-dollar swap to inject liquidity into the banking system and boost dollar reserves. The move helped the rupee regain a bit of ground. But the question is whether such interventions would be enough in the face of further pressure from oil prices, the threat of imported inflation, a strengthening dollar and higher Treasury yields.