By Shivaji Sarkar
The Iran war is hurting India more than it could ever imagine. It’s hitting gas supplies, NRI remittances, FDI and causing immense losses to the RBI. As of April 2026, the RBI burnt approximately $40 billion in foreign exchange reserves to defend the rupee from dropping further in massive intervention measures.
This aggressive action is in response to the rupee touching a record low of over 95 to the dollar on 30 March, driven by heavy oil import bills (with crude over $100 a barrel), foreign capital outflows, and massive arbitrage speculation. The RBI imposed strict limits, forcing banks to unwind roughly $30-$40 billion in arbitrage positions where they were betting against the rupee.
Oil companies were directed to use specialized credit lines rather than the open market for dollar purchases to prevent further depreciation. Following these measures, the rupee recovered to around Rs 93.20 to the dollar by April 16. The forced, rapid unwinding of positions has led to potential losses of Rs 3,000-4,000 crore for the banking sector. Despite the intervention, analysts warn that high oil prices and geopolitical tensions may keep the rupee under pressure, with the RBI likely to maintain tight control.
The rupee’s weakness is not a short-term fluctuation but reflects deeper structural imbalances in India’s external sector. A key factor is the country’s heavy dependence on imported energy which makes the currency highly vulnerable to global shocks.
At the same time, capital flows have turned adverse. Heightened geopolitical uncertainty has triggered risk aversion among foreign investors, leading to sustained outflows from Indian equity and debt markets. Even prior to the West Asia conflict India was struggling to attract sufficient foreign capital with FDI stagnating and portfolio flows weakening.
Against this backdrop, the RBI has stepped up intervention in currency markets, selling large amounts of dollars in both spot and forward segments to curb depreciation. More recently, it has introduced unconventional measures, including restrictions on banks’ foreign exchange positions and curbs on offshore market linkages. While these actions are officially framed as efforts to manage volatility, their scale and nature suggest an attempt to influence the exchange rate level itself.
Such intervention carries significant risks. By distorting price discovery, it weakens the role of the exchange rate as a market signal. Policy unpredictability—especially sudden regulatory shifts—can undermine investor confidence, raise hedging costs, and discourage both foreign and domestic participation in financial markets.
The fundamental issue is that the rupee’s depreciation reflects underlying economic pressures that cannot be sustainably offset through intervention alone. A weaker currency, while uncomfortable, plays an essential adjustment role: it discourages imports, supports exports, and can make domestic assets more attractive to investors. Over-intervention may stabilise the rupee temporarily, but at the cost of credibility and efficiency. A more durable approach would involve addressing structural weaknesses, restoring investor confidence, and allowing the exchange rate to function as a genuine market-driven price within an increasingly open financial system.
The remittances sent back home by Indians working abroad have registered a 14% rise in FY25 to a record $135.46 billion, from 18.8 million Indian workers abroad, according to data compiled by the RBI. They sent home a record $129.4 billion in 2024. India tops the list of recipient countries for remittances in 2024 and is way ahead of second-placed Mexico with $68 billion. China ($48 billion) is in the third spot, followed by the Philippines ($40 billion) and Pakistan ($33 billion), according to World Bank.
Peace, when it comes, is unlikely to be shaped by traditional Western powers. It will more plausibly be brokered by Russia and China, reflecting a shifting global balance. This raises a difficult but unavoidable question for India: how should it position itself in an emerging geopolitical configuration that may increasingly be anchored by a Russia–China–Iran axis? Ignoring these shifts carries risks.
Strategic misalignment could translate into greater instability along India’s periphery, particularly in sensitive border regions. India cannot afford a reactive posture. It must reassess its strategic options with clarity and speed—balancing geopolitical realities with its long-term national interests, economic resilience, and social cohesion. This evolving challenge demands more than short-term responses. It calls for a broader rethinking of policy, institutions, and priorities.
