Article 3: Currency Depreciation & Oil Shock
Why in News: The Indian rupee recently breached 93 per US dollar, hitting a record low due to West Asia conflict, rising crude oil prices, and foreign capital outflows.
Key Details
- Rupee touched a low of 93.77/$, marking a sharp depreciation in March 2026.
- Crude oil prices surged to around $117/barrel, far above RBI’s assumed $70 baseline.
- Foreign investors’ outflows and global uncertainty added pressure on the rupee.
- RBI intervened by selling forex reserves, which fell to around $709.8 billion.
Exchange Rate & Rupee Depreciation
- Meaning of Exchange Rate: Exchange rate refers to the value of one currency in terms of another. A rise from 90 to 93 per dollar indicates depreciation of the rupee, making imports costlier.
- Types of Exchange Rate Systems: India follows a managed floating exchange rate, where market forces determine value but RBI intervenes to reduce excessive volatility.
- Depreciation vs Devaluation: Depreciation is market-driven, unlike devaluation which is a deliberate policy decision. Current rupee fall is due to external economic pressures.
- Historical Trend: The rupee has shown gradual weakening over decades due to inflation differentials and trade imbalances, but sharp falls occur during global crises.
Role of Crude Oil Prices
- Import Dependence: India imports nearly 85% of its crude oil requirement, making the economy highly sensitive to global oil price fluctuations.
- Impact on Trade Deficit: Rising oil prices increase the import bill, widening the current account deficit (CAD) and exerting downward pressure on the rupee.
- Recent Surge: Oil prices rose to $117/barrel in March 2026, compared to RBI’s assumption of $70, significantly worsening external balance.
- Transmission to Economy: Higher oil prices lead to inflation, fiscal pressure (subsidies), and currency depreciation, creating a macroeconomic ripple effect.
Geopolitical Factors
- Energy Supply Disruptions: Conflict involving Iran and Israel has disrupted key energy infrastructure such as South Pars gas field and LNG hubs, tightening global supply.
- Global Risk Sentiment: Geopolitical instability leads to safe-haven demand for US dollar, causing emerging market currencies like the rupee to weaken.
- Oil Price Volatility: West Asia accounts for a major share of global oil supply; any conflict triggers price spikes and uncertainty.
- Historical Precedence: Similar patterns were observed during events like the Gulf War and Russia-Ukraine conflict, affecting India’s external sector.
Capital Flows & Foreign Investment
- Foreign Portfolio Investment (FPI): Outflows by foreign investors reduce demand for rupee, leading to depreciation. Recent withdrawals from Indian markets intensified pressure.
- Dollar Strength: A strong US economy and higher interest rates increase capital flows to the US, strengthening the dollar globally.
- Balance of Payments Impact: Capital outflows combined with a rising CAD create a double deficit problem, weakening currency stability.
- Market Volatility: Global uncertainty increases risk aversion, leading to sudden and large capital movements, impacting exchange rates.
RBI Intervention & Forex Reserves
- Role of RBI: RBI intervenes in forex markets by selling dollars to stabilize the rupee and reduce volatility.
- Decline in Forex Reserves: India’s reserves fell by around $18–19 billion in March 2026, reflecting active intervention.
- Past vs Present Intervention: RBI sold nearly $400 billion in 2024–25, but initially adopted a hands-off approach in 2025–26 before becoming proactive.
- Limits of Intervention: Continuous intervention can deplete reserves, hence RBI balances between stability and reserve adequacy.
Economic Implications of Rupee Depreciation
- Inflationary Pressures: Depreciation makes imports like fuel, fertilizers, and electronics costlier, contributing to imported inflation.
- Impact on Trade: While exports become more competitive, India’s export basket has low elasticity, limiting benefits.
- Fiscal Impact: Higher import costs may increase subsidy burden (fuel, fertilizers), affecting fiscal deficit.
- Growth Concerns: Persistent currency weakness can deter investment and create macroeconomic instability.
Conclusion
Rupee depreciation reflects India’s vulnerability to external shocks such as oil prices and geopolitical tensions. Strengthening domestic fundamentals through diversification of energy sources, boosting exports, maintaining adequate forex reserves, and prudent macroeconomic management is essential. A balanced approach by RBI, along with structural reforms, can ensure long-term currency stability and economic resilience.
EXPECTED QUESTION FOR UPSC CSE
Prelims MCQ
Which of the following factors can lead to depreciation of the Indian rupee?
- Rise in crude oil prices
- Increase in foreign portfolio investment
- Widening current account deficit
Select the correct answer:
(a) 1 and 3 only
(b) 2 and 3 only
(c) 1, 2 and 3
(d) 1 only
Answer: (a)