India's Forex Reserves Drop as RBI Intervenes to Support Rupee Amid Iran War

India’s foreign exchange reserves fell by $11.68 billion in the week ending March 6, marking the largest decline since November 2024. This drop reflects the Reserve Bank of India’s increased intervention to support the rupee amid volatility caused by the ongoing Iran war. The central bank has stepped into both foreign exchange and bond markets to counter rising crude oil prices and stabilize the currency.

The rupee has depreciated to record lows against the U.S. dollar, breaching 92 per dollar amid surging crude prices. The conflict in the Middle East has intensified concerns about supply disruptions in oil and gas, particularly through the strategic Strait of Hormuz.

India’s central bank has injected an estimated $12 billion into the forex market this week to defend the rupee. . The intervention was heaviest on Thursday, March 5, 2026, and has involved activity across spot, forwards, futures, and NDF markets.

Why the Move Happened

The RBI’s intervention is a response to the volatility caused by the war in the Middle East and the resulting spike in crude prices. Oil prices have surged nearly 37% since the war began, putting pressure on the rupee and increasing inflation risks. The central bank has also been purchasing bonds through open market operations to inject liquidity into the banking system, helping to counter the impact of dollar sales to support the currency.

India imports nearly 90% of its crude oil, and a prolonged war could significantly widen the current account deficit. The government may face additional fiscal pressures due to increased oil import costs and higher subsidies for key commodities.

How Markets Responded

India’s forex reserves have been drawn down by roughly $6.1 billion from dollar sales and an additional $5.4 billion from revaluation losses, according to IDFC First Bank’s chief economist. The central bank’s actions have helped stabilize the rupee, but further depreciation is a risk if oil prices remain elevated.

The rupee has depreciated 2.5% so far in 2026, moving from 89.95 in December 2025 to its current level. Broader emerging market pressures, including foreign fund exits and increased oil import bills, have also contributed to the rupee’s decline.

Corporate India is also feeling the impact of the rupee’s weakness, with exporters facing mark-to-market losses and importers shifting to forward contracts for hedging.

What Analysts Are Watching

Economists are closely monitoring the RBI’s ability to maintain the rupee’s stability amid prolonged conflict in the Middle East. If the war continues, the central bank may need to increase its bond-buying program and intervene more frequently in the currency market.

India’s foreign exchange reserves, which stood at a record $728.5 billion at the end of February, provide a buffer for the central bank. However, sustained pressure on the rupee could lead to a rapid depletion of these reserves.

The central bank has also taken steps to manage liquidity by conducting buy-sell swaps and purchasing bonds. These measures aim to offset the impact of dollar sales and maintain financial stability.

Analysts predict that the rupee will remain volatile in the short term, with downside risks if oil prices continue to rise. If the conflict subsides and crude prices ease, the rupee may stabilize around 91.50.

The government has also secured additional supplies of liquefied petroleum gas (LPG) and liquefied natural gas (LNG) that bypass the Strait of Hormuz. This move is intended to mitigate the impact of potential supply disruptions.

India’s oil stocks are currently sufficient to cover 20 to 25 days of consumption. However, a prolonged crisis could strain these reserves and impact both industrial production and consumer demand.

The RBI and government are under pressure to balance the need for currency stability with the risks of inflation and fiscal deficits. If oil prices remain at $100 per barrel, India’s GDP growth could fall to 6.6%, and inflation could rise to 4.1%.

Investors are advised to monitor the Reserve Bank of India’s actions, oil price trends, and the broader geopolitical situation in the Middle East. These factors will play a key role in determining the future trajectory of the rupee and India’s economic outlook.