War-struck rupee: If the oil shock persists, India will need to widen its crisis response toolkit

The right answer is that it depends—on how long the war continues. More specifically, on how long the Strait of Hormuz remains shut to oil tankers.

The price of Brent crude oil hit a high of nearly $120 per barrel on 9 March, surging by about 66% since the Iran war started on 28 February. Brent has dipped, but threatens to go into three digits again.

We import almost 90% of our crude-oil needs and a larger proportion of our natural gas, with a sizeable portion of these shipments now trapped in the Gulf by the war. This dims the prognosis for our trade deficit, inflation, fiscal position and rupee’s value against the dollar.

The rupee was Asia’s worst-performing major currency in 2025. It was suffering from capital market outflows and weak net foreign direct investment (FDI) even before the war started. And has been on a downward path since.

On Thursday, it again tested a historic low of 92.35 to the dollar. Foreign institutional investors have reportedly pulled out more than ₹21,000 crore from Indian markets in March so far.

The Gulf states are home to some 10 million Indian expats who account for 38% of our inward remittances. Prolonged hostilities are bound to impact the money sent home from that warzone. Meanwhile, as importers rush to take cover, dollar demand is sure to rise.

Unless peace returns swiftly and energy markets calm down—the Hormuz choke’s effect could outlast the choke itself—the war will worsen the rupee’s underlying weakness. What should India’s government and central bank do? Administrative measures such as raising the price of cooking gas (with tighter rationing) and relaxing FDI norms further to attract more inflows could help.

So may diplomacy to get more oil released globally from storage facilities. But only at the margin. As for the Reserve Bank of India (RBI), an obvious—though not necessarily wise—response would be to combine a hike in its policy rate with market intervention in support of the rupee by selling dollars from its chest of foreign-exchange reserves ($728 billion on 27 February). But costlier credit could hurt GDP growth and current inflation forecasts do not warrant it.

While RBI has been intervening periodically to stem the rupee’s decline, no central bank can withstand market forces indefinitely. Moreover, it has long been RBI’s officially stated position (even if not entirely believed) that it does not target any level but intervenes in the market only to reduce volatility.

In such a scenario, if the war goes on, we might have to resort to tried-and-tested policy options such as incentivizing inflows from non-resident Indians and easing external commercial borrowings, both of which would have costs to consider.

We may also need to revisit ideas that would mark a retreat from the liberalization goal of full rupee convertibility. Temporary curbs on current account transactions and lower limits on outward remittances are not ideal from a globalization perspective, but would conserve dollars and ease the ‘trilemma’ effect of rupee support resulting in tighter monetary conditions in the economy.

Since these are not normal times, taking one step backwards to take two steps forward later may not be a bad idea. Let’s keep all options open.