MUMBAI: If the Iran war continues for another month, the rupee, which has lost nearly 9% so far this fiscal including over 4.5% since the war began nearly a month back, may breach another sensitive barrier of 96 to a dollar, State Bank of India economists have warned. However, they say if the conflict stops over the next week to ten days, the unit may rally to 91.5-94.5. They have also ruled out any impact on remittances this fiscal because of the tension in the second largest source market.
Soumya Kanti Ghosh, the chief economic advisor to State Bank of India, said since the start of the war, the rupee at the Non-Deliverable Forward (NDF) market is trading at 96.43 while most volatility remains concentrated in near term NDFs, which are foreign exchange derivatives contracts used for currencies that are not freely convertible.
“Going forward, if the war stretches beyond 10 days, the rupee is likely to face depreciation headwinds further (considering no significant intervention by the RBI). If the war continues for another month, the rupee may cross the 96 level but if the war stops in another seven to ten days, the unit is likely to be largely trading in a 91.5-94.5 range," Ghosh said in a note.
Regular intervention by the central bank on both sides by selling dollars to prevent sharp depreciation and on some days buying dollars when the rupee is appreciating has helped the rupee remain less volatile through the current year, he said.
Ghosh also busted another narrative that the rupee fall helps harried exporters whacked by US tariffs since last August and now the Iran war, saying the argument that a cheaper rupee acts as a shock absorber and hence should be allowed to depreciate does not hold beyond a point.
“The rupee cannot act as a shock absorber beyond a threshold after which it does not absorb shock any further because exporters’ responses indicate that exports respond weak exchange rates only in small manner which is statistically insignificant across all horizons," he said.
The latest export growth of 0.6% in January 2026 also establishes this as since January 2025 the rupee has depreciated by around 6%. This implies that exchange rate depreciation does not significantly stimulate exports thereby indicating that the rupee is no longer functioning as an effective shock absorber.
Meanwhile, Ghosh ruled out the possibility of the war impacting the inflow of remittances, instead saying, “In fact there will be higher inflows from the diaspora due to more attractive exchange rate.” This apart, deposits are not marked to market and are usually fully lent out. This means there will be little to no impact of rupee depreciation on FCNR(B) books of banks.
Ghosh sees remittances reaching $140-145 billion this fiscal, up from $135.4 billion last fiscal, as the country remains the world's largest diaspora, with over 3.5 crore Indian-origin people living abroad as of 2024. Of this, around 1 crore are in the six Gulf Cooperation Council countries of Saudi Arabia, Kuwait, the UAE, Qatar, Bahrain and Oman alone, constituting the largest foreign workforce in the region.
The country has been topping global remittances for over 25 years since the information technology boom in the 1990s and has consequently received over $100 billion for the third year in a row in FY25. In FY25, diaspora remittances hit a new record of $135.4 billion up from $118.7 billion in FY24, an increase of 14%. During the first three quarter of FY26, the inflows reached $110 billion, compared to $100 billion in the 12 trailing months.
But he sees remittance inflows stagnating next fiscal at $135-140 billion if the Iran war last longer due to job losses in construction services and energy sectors in the region.
"Escalating violence increases the need for large-scale evacuations, halting remittances and placing economic strain on households. We have seen similar reverse migration during the pandemic but it is expected that once things normalise, people will again move to the workplaces. So, remittances will not be much impacted in FY27," said Ghosh.
"In the post-conflict period in the past, we have seen an incremental jump of 30-35% remittances from West Asia, which is the single largest region for inflows chipping in over 36% of the total with the UAE alone contributing 19% of that," he said.
“Based on the data of FY20 and FY21, we expect remittances may reach all time high of $137-140 billion in FY26 but will be in the range of $135-137 billion in FY27,” he added.
