Rupee Plunges as Geopolitical Tensions Ignite Currency Crisis

The Indian rupee (INR) faced its steepest weekly decline in over two years in early May 2025, driven by escalating India-Pakistan border tensions, a stronger U.S. dollar, and rising crude oil prices. By May 10, the rupee had depreciated to 86.1331 against the U.S. dollar, marking a sharp 0.9% weekly drop and erasing all gains from the year-to-date. This decline underscores the fragility of emerging markets amid geopolitical crises and global macroeconomic headwinds.

Geopolitical Escalation: The Catalyst for Market Volatility

The conflict’s sudden intensification on May 8-10 sent shockwaves through financial markets. Pakistan launched Operation Bunyan Ul Marsoos, targeting Indian military installations, while India retaliated with strikes on Pakistani airbases near major cities. This marked the worst cross-border hostilities in nearly three decades, triggering a “risk-off” sentiment. Capital fled emerging markets, with investors favoring the U.S. dollar—a traditional safe-haven asset—as evidenced by the dollar index breaching 100.65, its highest since April 2023.

The rupee’s vulnerability was compounded by Pakistan’s closure of its airspace and threats of “massive retaliation,” raising fears of nuclear escalation. Analysts warned that prolonged conflict could push the INR toward 86.50-87.00, as seen in the May 10 rate of 86.1331, which already reflects heightened investor anxiety.

Market Dynamics: Oil, Bonds, and Equity Sell-Offs

Three key factors amplified the rupee’s decline:

1. Crude Oil Prices: Brent crude surged to $63.10 per barrel, worsening India’s trade deficit. With India importing 85% of its oil needs, higher crude prices increased import costs, further weakening the rupee.
2. Bond Market Pressure: Yields on 10-year Indian government bonds rose by 10 basis points to 6.40%, reflecting heightened risk aversion. The Reserve Bank of India (RBI) attempted to stabilize markets via an ₹25,000 crore open-market bond purchase, but traders remained skeptical.
3. Equity Sell-Offs: The Nifty 50 index fell 276 points, while defense stocks like Bharat Dynamics surged—a rare bright spot in an otherwise gloomy market.

Analysts’ Outlook: Short-Term Pain, Long-Term Uncertainty

Experts are divided on the rupee’s trajectory:
- Short-Term Risks:
- Neeraj Gambhir of Axis Bank warns that further escalation could push the INR to 86.50, citing the 200-day Exponential Moving Average (EMA) breakout at 85.25.
- The RBI’s inaction so far has fueled speculation about potential interventions, including forex sales or policy tightening.

• Long-Term Stabilization:
• Amit Pabari of CR Forex Advisors notes that strong macro fundamentals—such as India’s 6% GDP growth and manageable inflation (projected at 3.8% for 2025)—could support a rebound if tensions ease.
• A de-escalation or U.S.-China trade talks (scheduled for May 13–14) might revive risk appetite and weaken the dollar, providing relief to emerging currencies.

Conclusion: A Delicate Balancing Act

The rupee’s sharp decline to 86.1331 by May 10, 2025, reflects the confluence of geopolitical risks, global dollar strength, and domestic macro pressures. While the RBI’s interventions have cushioned the fall, traders remain cautious. A resolution to the India-Pakistan conflict is now critical to stabilizing the currency.

Investors should monitor three key indicators:
1. USD/INR Rate: Will it breach 86.50, or stabilize at current levels?
2. Crude Oil Prices: A sustained drop below $60 could ease import pressures.
3. Geopolitical Developments: U.S. mediation and Pakistan’s troop movements will determine whether markets regain confidence.

In the absence of de-escalation, the rupee’s decline could deepen, with the 87.00 threshold—last breached in February 杧25—becoming a realistic near-term target. For now, the rupee’s fate remains intertwined with the fragile ceasefire between two nuclear-armed neighbors.

The path ahead is fraught with uncertainty, but one thing is clear: investors must brace for volatility until the geopolitical storm subsides.