Market analysts described the situation as a “trifecta effect,” where crude oil prices, a strong dollar, and ongoing geopolitical conflict collectively weighed on emerging market currencies, with India bearing significant impact due to its import dependence.
Brent crude oil surged and remained elevated around 122 dollars per barrel, sharply increasing India’s import burden and placing immediate downward pressure on the rupee. At the same time, the United States dollar index remained firm following a pause in rate cuts by the Federal Reserve, reducing the attractiveness of emerging market currencies. Adding to the strain, the ongoing Iran conflict and disruptions around the Strait of Hormuz, a critical global energy route for India, pushed investors toward safe-haven assets, further strengthening the dollar.
The combined impact triggered volatility in domestic financial markets. The Sensex declined by over 800 points in early trade on Thursday, while the Nifty fell nearly 250 points. Foreign Institutional Investors sold equities worth 2,468.42 crore rupees on Wednesday, intensifying capital outflows.
Abhishek Bhilwaria, an AMFI-registered mutual fund distributor, said the weakening rupee presents a dual impact. He noted that it drives imported inflation and pressures sectors dependent on imports such as electronics and aviation, while benefiting export-oriented industries including information technology and pharmaceuticals due to stronger dollar earnings. He added that currency depreciation can increase foreign capital flight risks and may prompt monetary tightening, creating short-term volatility in equities and bond markets, while international mutual funds and gold holdings act as natural hedges.
Amid these external pressures, the Reserve Bank of India’s rupee internationalisation strategy, initiated in 2022, is emerging as a partial buffer. The framework for settling international trade in rupees, initially viewed as a long-term experiment, is now playing a stabilising role in reducing foreign exchange demand.
In February alone, Indian traders settled imports worth 14,057 crore rupees in domestic currency, equivalent to approximately 1.5 billion dollars in foreign exchange savings. Although this accounts for 2.35 percent of total transactions, it gains significance in the context of India’s 119 billion dollar trade deficit, where every dollar conserved helps reduce external vulnerability.
Export transactions are also increasingly being settled in rupees, narrowing the gap between imports and exports under the domestic currency framework. Banking access has expanded, with financial institutions in 30 countries, including Germany, Israel, Malaysia, New Zealand, Oman, Russia, Singapore, and the United Kingdom, permitted to open rupee accounts with Indian banks.
India has also established local currency trade agreements with the United Arab Emirates, Indonesia, and Maldives, alongside long-standing arrangements with Bhutan and Nepal. Sri Lanka has further expanded its foreign currency basket to include the Indian rupee.
Reserve Bank of India Deputy Governor T. Rabi Sankar recently reaffirmed the central bank’s long-term commitment to the internationalisation of the rupee, underscoring its strategic importance in global trade diversification.
Economists suggest that the ongoing Iran conflict may accelerate a gradual shift toward non-dollar trade settlements in energy markets, although the dominance of the United States dollar remains firmly intact. India’s push for rupee-based trade is therefore positioned within a broader global effort toward currency diversification.
In the short term, the rupee’s trajectory will remain dependent on crude oil prices, dollar strength, foreign institutional investment flows, and geopolitical developments. In the medium term, structural reforms such as the rupee settlement framework and expanding global acceptance of Indian currency accounts are expected to soften external shocks and reduce volatility.
Siddharth Maurya, Managing Director of Vibhavangal Anukulkara, stated that the rupee’s depreciation stems from both domestic and international factors, affecting households, businesses, and investors. He noted that a weaker currency increases import costs and inflationary pressures, advising investors to maintain prudence and diversify portfolios, including exposure to international equities.
The fall of the rupee to unprecedented levels underscores a critical warning for the economy, even as structural shifts in global trade and currency usage gradually aim to cushion the impact of future external shocks.
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