India is scrambling to salvage a sinking rupee as surging oil prices linked to the Middle East conflict threaten to disrupt the world’s fastest-growing major economy.

The currency has dropped more than 5 percent since the crisis erupted in February, extending losses from 2025 and making it Asia’s worst-performing major currency in 2026 so far.

Why is the rupee falling in India?

The rupee is falling because surging oil import costs, driven by the Middle East conflict, have widened India’s current account deficit while foreign investors have dumped more than $20 billion in Indian stocks.

Higher dollar demand for energy imports, combined with weaker capital inflows, has left the currency under sustained pressure with few near-term relief levers.

The rupee hit a record low of over 96 to the dollar on Friday, prompting officials to signal that halting further depreciation is a key macroeconomic priority.

“The whole system has been disturbed,” said Dilip Parmar of stockbroker HDFC Securities, citing heavy foreign investor outflows, weaker growth prospects and elevated crude prices. It was ultimately “a function of demand and supply,” he said, with dollar demand running higher.

What has India’s central bank done to stop the rupee decline?

India’s central bank has already poured billions of dollars into the foreign exchange market to stabilize the currency. It has also curbed speculative trading and offered a special credit line to oil importers to ease dollar demand.

Prime Minister Narendra Modi has urged voluntary austerity measures, including cutting down on gold buying and foreign travel for a year, to rein in dollar-guzzling imports.

But the pressure persists. Foreign exchange reserves now stand at around $697 billion, down from over $720 billion before the Middle East war began.

While reserves still cover about 11 months of imports, the decline underscores the scale of the strain.

How wide is India’s current account deficit getting?

The current account deficit is likely to exceed 2 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.

Foreign investors have exited Indian stocks at the fastest pace on record since the conflict began. The resulting dollar shortfall opens the possibility of a balance-of-payments gap as large as $67-88 billion.

The 2027 fiscal year “will be our third year of a balance-of-payment deficit, which is certainly unusual,” economist Dhiraj Nim of ANZ Research told AFP.

Brent crude prices have surged nearly 50 percent since the outbreak of the Iran conflict, dramatically increasing the cost of India’s heavy energy imports. That combination of higher costs and weaker inflows has pushed the rupee toward historic lows.

How is the weak rupee hitting Indian businesses and consumers?

A weaker rupee is rippling through the domestic economy, squeezing manufacturers and food processors that depend on imported raw materials priced in dollars. Smaller firms often lack the ability to hedge currency risks, leaving them exposed to the full force of the depreciation.

In Kerala’s cashew industry, which mostly imports raw nuts from Africa, the impact has been acute. “Imports have become far more expensive for the local market,” said Rajmohan Pillai, who runs a cashew firm, adding that buyers can now afford only about 90 percent of last year’s volumes.

He estimates more than 80 percent of processing units have shut in recent years, with rupee volatility a contributing factor.

Who else is feeling the pinch from the rupee’s slide?

Students planning to study abroad have also been caught in the fallout. Education consultants say studying in the United States now costs more than one million rupees ($10,450) extra compared with a year ago.

“This is the last straw,” said Meghna Sen, a 17-year-old aspiring psychology student. “Now we have to track the rupee movement to check how much we need for our grocery budgets.”

The depreciation has also punctured India’s ambition to become the world’s third-largest economy. Modi, who once criticized his predecessors over currency weakness, has seen India’s global economic ranking dented because GDP comparisons are measured in dollars.

The country has slipped behind the United Kingdom to sixth place according to IMF data, largely due to the rupee’s fall.

What measures could India take next to defend the rupee?

Nomura analysts warn more drastic measures may be on the way if the current situation persists.

These include possible fuel price hikes, tighter controls on overseas remittances and steps to attract dollar deposits from non-resident Indians, a playbook used in past currency crises.

An interest rate hike targeting future inflation has also not been ruled out.

Economists caution, however, that intervention can only smooth volatility, not reverse underlying pressures. “Fundamental factors” remain to be resolved, Nim said.

The Reserve Bank of India knows what its options are, he added. “All that remains is to see what it decides to choose.”