No respite in sight for the rupee
April 16, 2026
It’s unlikely that the RBI will be able to prevent its slide in 2026-27.
THE rupee closed at 94.35 to the dollar on March 31, declining in a year by 10.5% from Rs 85.4 (its rate on March 31, 2025). In free fall since September last year, the rupee touched nearly 95/dollar on March 27. After the Reserve Bank of India (RBI) took some extraordinary measures and a ceasefire was brokered between the US and Iran, it is currently trading around Rs 93/dollar.
The rupee’s depreciation hurts India badly. Dependence on energy and Chinese imports makes our situation worse, while Indian merchandise exports don’t gain any additional traction as we don’t have products which the world has to import only from India or which we offer at the most competitive prices.
Foreign loans and their servicing become much costlier when the rupee depreciates. It is necessary to look at what is in store for the rupee in 2026-27. Will it touch the 100/dollar mark? Will it depreciate again by 10%? Does the RBI have sufficient firepower to stem the rot?
The RBI’s foreign currency reserves (FCRs) of $551 billion — our stock of dollars and other foreign currency assets and deposits — are its real firepower. Headline foreign exchange reserves of $688.1 billion — the RBI’s total reserves — include, besides FCRs, gold reserves ($113.5 billion) and our holdings in the International Monetary Fund ($24.4 billion). Gold reserves are difficult to sell, especially for India, as considerable odium is attached to it, thanks to the gold sales we had to undertake in 1991. Other components are too small.
Gold reserves make up as much as one-sixth (16.5%) of the RBI’s total reserves. Gold did not have that dominance earlier. The RBI’s fascination for the purchase of gold in the past four years and higher gold prices have materially reduced the real firepower — the FCRs’ share. In March 2022, FCRs at $553.7 billion were nearly 90% of the total reserves ($619.7 billion). Currently, FCRs make up only about 80% of the total reserves.
There is another factor which reflects the RBI’s mindset: it is unwilling to use its firepower. India was precariously vulnerable in 1991, with its total reserves being less than $10 billion. This gave us the mindset of wanting to add more and build “adequate” reserves. When reserves reached $100 billion in 2003-04, we felt adequately covered, but only for some time. In 2007-08, our reserves crossed $300 billion and remained at that level for the next 4-5 years. Still, India suffered a bout of rupee depreciation in 2013 when the taper tantrum struck (the US Federal Reserve decided to reduce purchases of bonds, making the dollar appreciate).
India launched a costly FCNR(B) deposit scheme (foreign currency non-resident accounts) to collect $26 billion to shore up reserves. In 2017-18, we had more than $450 billion in reserves, yet we panicked when crude went past only $80 a barrel and foreign portfolio investors (FPIs) withdrew about $50 billion. Instead of using reserves, the government and the RBI contemplate raising $50 billion in forex deposits/bonds.
Currently, we have total reserves of about $700 billion and FCRs of $550 billion. Yet, the RBI finds it difficult to use reserves for arresting the fall of the rupee. In the past few months, the Central bank went on adding to its reserves by undertaking swap operations (buying dollars now to sell dollars later) of about $80 billion.
How should we assess the adequacy of our reserves (FCRs for me)? It has been traditionally measured in terms of months of merchandise imports they can finance; 10-12 months’ coverage is considered comfortable. This, however, is not a good benchmark. Current account deficit (CAD) matters more. India’s total imports of $915.2 billion in 2024-25 were more than 90% financed by exports of $825.3 billion. Surplus in other items of current account (like remittances from our workers abroad) reduced CAD to only $23.3 billion in 2024-25, which hardly needed about 4% of FCRs to finance it.
It is the capital account (receipts of equity, bonds and NRI deposits minus payments for loans taken and investments withdrawn) which should worry us more. Our foreign exchange reserves have been built by surpluses in the capital account. Two big volatile constituents of capital account — foreign debt and portfolio investment — can cause real trouble.
Foreign debt flows reverse when the rupee depreciates, as servicing and hedging costs go up. Indian holders of foreign debt stop borrowing and start paying off. For FPIs, their rupee investment in Indian equities and debt lose big when stock markets plummet and the rupee depreciates (as loss in share value and exchange rate far exceeds dividends, as is happening currently). In 2025-26, FPI investments generated large negative returns of more than 15%. No wonder FPIs sold over Rs 1 trillion worth of equities in March 2026 alone.
The ratio of outstanding foreign debt and portfolio liability to India’s foreign currency reserves is a better marker to see where the rupee-dollar exchange rate is headed. India’s foreign debt is about $750 billion. FPIs’ stock is also about the same amount. Together, these volatile foreign debt and portfolio investment assets are about $1.5 trillion, which is about 2.7 times the RBI’s currency reserves. This is India’s real vulnerability. A ratio of more than 1 should worry policymakers and the RBI.
Prospects for 2026-27 are indeed quite worrying. The damage to oil and gas production infrastructure in the Middle East, which produces more than 20% of the global oil and 30% of the natural gas supplies, is extensive and unlikely to be undone anytime soon, even if there is a permanent agreement. Iran has successfully weaponised the Strait of Hormuz and would continue to recover a toll charge (currently $1 million per ship). Iran has the ability to regulate the supply/flow of oil.
Iran and other members of the Organisation of Petroleum Exporting Countries (OPEC) are likely to ensure that oil prices stay around $90-100 per barrel in 2026-27. This will make India’s oil bill go up massively as every $10 per barrel increase in crude oil prices adds about $50 million a day to our import bill, making the current account worsen. FPIs are unlikely to return to Indian markets anytime soon. With a weakening rupee, they may continue to exit.
Foreign direct investment (FDI) inflows are moribund and likely to stay close to zero as India remains unwilling to open up Chinese investment, which only has the potential to increase capital inflows.
The recent steps taken by the Indian government to allow equity funds with not more than 10% beneficial interest of the Chinese are too little to make any difference.
Tough times seem to lie ahead for the rupee in 2026-27. India might soon witness Rs 100 to a dollar. The rupee is likely to depreciate by 6-10% during this financial year.
The rupee’s depreciation hurts India badly. Dependence on energy and Chinese imports makes our situation worse, while Indian merchandise exports don’t gain any additional traction as we don’t have products which the world has to import only from India or which we offer at the most competitive prices.
Foreign loans and their servicing become much costlier when the rupee depreciates. It is necessary to look at what is in store for the rupee in 2026-27. Will it touch the 100/dollar mark? Will it depreciate again by 10%? Does the RBI have sufficient firepower to stem the rot?
The RBI’s foreign currency reserves (FCRs) of $551 billion — our stock of dollars and other foreign currency assets and deposits — are its real firepower. Headline foreign exchange reserves of $688.1 billion — the RBI’s total reserves — include, besides FCRs, gold reserves ($113.5 billion) and our holdings in the International Monetary Fund ($24.4 billion). Gold reserves are difficult to sell, especially for India, as considerable odium is attached to it, thanks to the gold sales we had to undertake in 1991. Other components are too small.
Gold reserves make up as much as one-sixth (16.5%) of the RBI’s total reserves. Gold did not have that dominance earlier. The RBI’s fascination for the purchase of gold in the past four years and higher gold prices have materially reduced the real firepower — the FCRs’ share. In March 2022, FCRs at $553.7 billion were nearly 90% of the total reserves ($619.7 billion). Currently, FCRs make up only about 80% of the total reserves.
There is another factor which reflects the RBI’s mindset: it is unwilling to use its firepower. India was precariously vulnerable in 1991, with its total reserves being less than $10 billion. This gave us the mindset of wanting to add more and build “adequate” reserves. When reserves reached $100 billion in 2003-04, we felt adequately covered, but only for some time. In 2007-08, our reserves crossed $300 billion and remained at that level for the next 4-5 years. Still, India suffered a bout of rupee depreciation in 2013 when the taper tantrum struck (the US Federal Reserve decided to reduce purchases of bonds, making the dollar appreciate).
India launched a costly FCNR(B) deposit scheme (foreign currency non-resident accounts) to collect $26 billion to shore up reserves. In 2017-18, we had more than $450 billion in reserves, yet we panicked when crude went past only $80 a barrel and foreign portfolio investors (FPIs) withdrew about $50 billion. Instead of using reserves, the government and the RBI contemplate raising $50 billion in forex deposits/bonds.
Currently, we have total reserves of about $700 billion and FCRs of $550 billion. Yet, the RBI finds it difficult to use reserves for arresting the fall of the rupee. In the past few months, the Central bank went on adding to its reserves by undertaking swap operations (buying dollars now to sell dollars later) of about $80 billion.
How should we assess the adequacy of our reserves (FCRs for me)? It has been traditionally measured in terms of months of merchandise imports they can finance; 10-12 months’ coverage is considered comfortable. This, however, is not a good benchmark. Current account deficit (CAD) matters more. India’s total imports of $915.2 billion in 2024-25 were more than 90% financed by exports of $825.3 billion. Surplus in other items of current account (like remittances from our workers abroad) reduced CAD to only $23.3 billion in 2024-25, which hardly needed about 4% of FCRs to finance it.
It is the capital account (receipts of equity, bonds and NRI deposits minus payments for loans taken and investments withdrawn) which should worry us more. Our foreign exchange reserves have been built by surpluses in the capital account. Two big volatile constituents of capital account — foreign debt and portfolio investment — can cause real trouble.
Foreign debt flows reverse when the rupee depreciates, as servicing and hedging costs go up. Indian holders of foreign debt stop borrowing and start paying off. For FPIs, their rupee investment in Indian equities and debt lose big when stock markets plummet and the rupee depreciates (as loss in share value and exchange rate far exceeds dividends, as is happening currently). In 2025-26, FPI investments generated large negative returns of more than 15%. No wonder FPIs sold over Rs 1 trillion worth of equities in March 2026 alone.
The ratio of outstanding foreign debt and portfolio liability to India’s foreign currency reserves is a better marker to see where the rupee-dollar exchange rate is headed. India’s foreign debt is about $750 billion. FPIs’ stock is also about the same amount. Together, these volatile foreign debt and portfolio investment assets are about $1.5 trillion, which is about 2.7 times the RBI’s currency reserves. This is India’s real vulnerability. A ratio of more than 1 should worry policymakers and the RBI.
Prospects for 2026-27 are indeed quite worrying. The damage to oil and gas production infrastructure in the Middle East, which produces more than 20% of the global oil and 30% of the natural gas supplies, is extensive and unlikely to be undone anytime soon, even if there is a permanent agreement. Iran has successfully weaponised the Strait of Hormuz and would continue to recover a toll charge (currently $1 million per ship). Iran has the ability to regulate the supply/flow of oil.
Iran and other members of the Organisation of Petroleum Exporting Countries (OPEC) are likely to ensure that oil prices stay around $90-100 per barrel in 2026-27. This will make India’s oil bill go up massively as every $10 per barrel increase in crude oil prices adds about $50 million a day to our import bill, making the current account worsen. FPIs are unlikely to return to Indian markets anytime soon. With a weakening rupee, they may continue to exit.
Foreign direct investment (FDI) inflows are moribund and likely to stay close to zero as India remains unwilling to open up Chinese investment, which only has the potential to increase capital inflows.
The recent steps taken by the Indian government to allow equity funds with not more than 10% beneficial interest of the Chinese are too little to make any difference.
Tough times seem to lie ahead for the rupee in 2026-27. India might soon witness Rs 100 to a dollar. The rupee is likely to depreciate by 6-10% during this financial year.