Oil Prices, Outflows And War: What’s Driving Rupee Weakness?

India’s currency is sliding again, and the latest data is raising fresh concerns. The rupee has already weakened close to 10% over the past year and recently touched a new low of 95.125 against the dollar. Derivatives markets now show about a 41% chance of it slipping to 100 by the end of the year, while crude prices have surged roughly 44% since late February.

That combination is keeping traders cautious. For a country that imports most of its oil, rising prices quickly feed into inflation and widen the current account gap, both of which tend to weigh on the currency.

Why Is The Rupee Under So Much Pressure?

The pressure is not coming from just one place. Analysts at Wells Fargo and VanEck point to a mix of factors that are all moving in the same direction.

Oil is the biggest trigger right now. As prices rise, India’s import bill climbs, which means more dollars are needed. That weakens the rupee. At the same time, inflation risks increase, limiting how aggressively policymakers can respond.

There is also the issue of capital flows. Foreign investors pulled around $12 billion out of Indian equities in March, the sharpest monthly exit on record. When money leaves at that scale, currencies usually take a hit.

On top of that, the rupee was already dealing with underlying issues such as weaker inflows and concerns around trade dynamics. The current geopolitical tensions have simply added another layer of stress.

What Has The RBI Done So Far?

The Reserve Bank of India (RBI) has tried to slow the fall. It recently capped how much exposure banks can carry in the currency market at the end of the day, setting the limit at $100 million.

The move had an immediate impact. The rupee jumped at the open, gaining over 1%. But the gains did not hold. By the end of the session on Monday, 30 March, the currency had reversed and slipped to a new low of 95.125.

This kind of reaction shows the limits of intervention. Such steps can calm markets briefly, but they do not change the bigger picture. If oil prices remain high and capital keeps flowing out, pressure on the rupee is likely to continue.

There is another angle too. Tighter rules can reduce liquidity in the market, making it costlier for businesses to hedge their currency risk. In some cases, trading activity can shift outside the domestic market.

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Could The Rupee Really Touch 100?

That question is no longer being dismissed. Several market participants now see it as a realistic outcome rather than a worst-case scenario.

Much will depend on how the Iran-related tensions evolve. Donald Trump has suggested the situation could ease in a few weeks, but there is still uncertainty around that timeline.

If the conflict drags on, oil prices could rise further. Some estimates even point to levels between $150 and $200 per barrel if supply disruptions worsen. In that case, the rupee could come under even sharper pressure.

Even if tensions cool off, a quick recovery may not follow. The currency was already on a weak footing before the latest developments.

For now, markets seem to be preparing for more volatility. Whether the rupee stabilises or slides further will depend largely on oil prices, global fund flows, and how long geopolitical risks stay in play.

Sources:

Bloomberg

The Economic Times