Rupee hits record ₹96.36/$ as West Asia conflict fears intensify

The benchmark 10-year government bond yield surged 7 basis points to 7.13%, its highest level since April 2, as reported by The Financial Express. US 10-year Treasury yields rose to as high as 4.63% on Monday, their highest level in more than a year, according to Jana Small Finance Bank. Heightened inflation concerns and expectations of possible rate hikes pushed domestic bond yields higher, with markets beginning to bet on earlier rate hikes amid inflation concerns arising from rising fuel prices. The rupee's weakness reflects broader market concerns about elevated energy prices and global uncertainty, with Brent crude oil prices surging to $111 per barrel in early Asian trade. The dollar index strengthened to 99.15, up more than 1% over the past week, with analysts noting that "conditions for the dollar rally to extend this week are ripe" as risk sentiment deteriorates.

Market experts are describing the rupee's decline as more than just a routine currency movement, with Harshal Dasani, Business Head at INVAsset PMS, stating that "The rupee at 96.3 is not just a currency move, it is the market repricing India's external balance sheet. Elevated crude, firm US yields and weak foreign flows are hitting the same pressure point: dollar demand is rising while capital inflows are not strong enough to absorb the shock." According to NDTV Profit, Dasani added that the RBI may smooth volatility, but it cannot fully offset a global dollar squeeze if oil stays elevated. For equities, the immediate pressure is on import-heavy sectors, rate-sensitive pockets and companies with unhedged dollar exposure, as highlighted by Dasani. Exporters get a translation benefit, but that benefit narrows if global demand slows. Only two of the seven market participants surveyed indicated the possibility of the Indian unit touching 100/$ in the next six months. Ritesh Bhansali of Mecklai Financial Services noted that "unless the Reserve Bank of India (RBI) or the government takes concrete steps to attract capital inflows, the rupee could weaken further to 97.5–98 against the dollar over the next quarter." Amit Pabari of CR Forex Advisors expects the bias to remain towards further weakness, likely taking the rupee to around ₹96.5–97 in the near term, with any de-escalation or measures from the government and RBI could reverse the trend, allowing the currency to appreciate by ₹1–1.50.

Within days of levying high customs duties on precious metals, the government on Saturday imposed import curbs on silver by putting the metal under a licensed regime for inbound shipments. The government, on May 13, hiked import duty on precious metals - gold, and silver - from 6% to 15%, with the effective duty (including 3% IGST) being over 18%. This represents a significant escalation in measures to control forex outflows through curbing non-essential imports. The government had previously hiked import tariffs on both silver and gold, with most silver imports restricted over the weekend after the government had lifted import tariffs on both silver and gold. India imported around 721 tonnes of gold in FY26, worth nearly $72 billion, compared with about $58 billion a year earlier, as reported by Business Standard. "Only stoppage of war and reopening of the Strait of Hormuz can bring about a lower demand on the $/rupee pair, else 100 seems to be on the card if RBI does not announce any schemes to increase dollar inflow into the country," said Anil Kumar Bhansali Head of Treasury and Executive Director Finrex Treasury Advisors LLP. The measures are specifically designed to control the outflow of forex by curbing non-essential imports.

The rupee's decline comes as India faces a widening current account deficit driven by costly energy imports, with the gap likely to be over two percent of GDP this fiscal year, more than double last year's level and potentially the widest since 2012-13, according to Bank of America Securities estimates. India's current account deficit stood at $13.2 billion, or 1.3% of GDP, in the October-December quarter of FY26, compared with $11.5 billion in the previous quarter, according to Reserve Bank of India data as reported by Business Standard. India's merchandise trade deficit widened to $28.38 billion in April as imports grew faster than exports, intensifying concerns over the country's external position. India's oil import bill stood at nearly $135 billion, while together with gold imports, crude oil and gold imports used more than $206 billion in foreign exchange during FY26. Foreign investors have dumped more than $23.2 billion in Indian stocks since the start of the Mideast conflict, the fastest pace on record, while dollar inflows have slowed, opening the possibility of a balance-of-payments gap as large as $67-88 billion. India's forex reserves jumped by $6.295 billion to $696.988 billion during the week ended May 8, the Reserve Bank said on Friday (May 15, 2026), as reported by The Hindu. India's forex reserves had dropped by $7.794 billion to $690.693 billion in the previous reporting week. India's forex reserves had hit an all-time high of $728.494 billion during the week ended February 27 this year, before the onset of the West Asia crisis. India's forex reserves are composed of foreign currency assets, gold reserves, and Special Drawing Rights (SDRs), with foreign currency assets increasing by $562 million to $552.387 billion and gold reserves soaring by $5.637 billion to $120.853 billion during the week ended May 8. Elevated oil prices and a depreciating currency have resulted in deterioration of current account, balance of payments and fiscal deficit, according to Gurvinder Singh Wasan, senior fund manager at Baroda BNP Paribas Mutual Fund.

The Reserve Bank of India is implementing a multi-pronged approach to defend the rupee rather than relying solely on drawing down forex reserves, according to Mitul Kotecha of Barclays. The RBI is intervening through forwards, both NDF and onshore forwards, to avoid dramatic reserve drawdowns, with recent measures including reducing banks' end-of-day positions to $100 billion and clamping down on banks' offshore NDF activities. Policymakers have also taken measures to ease pressure on the rupee including by imposing curbs on imports of precious metals, with most silver imports restricted over the weekend after the government had lifted import tariffs on both silver and gold. "Though not aggressive, the RBI was defending certain levels to support the currency. In the absence of that, the depreciation would have been much sharper," said a dealer at a private sector bank. With the rise in oil prices to beyond $111.50 per barrel, rupee will be affected the most as rising oil prices increases the outflows of U.S. dollar along with the outflows already happening due to FPIs, said Anil Kumar Bhansali Head of Treasury and Executive Director Finrex Treasury Advisors LLP. The REER stands at 93 as of March-end, suggesting the rupee is undervalued, but currencies often trade away from fair valuations for extended periods. India's position is stronger than the 2013 taper tantrum period when reserves covered only 6.3 months of imports, with current reserves providing 9.5 months of coverage when including the forward book.