Topic 4: RUPEE: RESERVE DRAIN
March 2026 will be remembered as a historic and deeply
uncomfortable month for the Indian rupee. The currency
breached the psychologically significant ₹93 per US
dollar mark for the first time ever around 20 March, went
on to touch an intraday record low of approximately
₹95.14, and eventually settled around ₹93.50 by month
end — implying a monthly depreciation of roughly 2–3%
and a cumulative 12-month slide of nearly 9–10% from
the ₹84–85 levels that prevailed in mid-2025. In absolute
terms, this was one of the steepest single-month
depreciations the rupee has ever recorded.
The primary culprit was the West Asia conflict and its
most immediate consequence for India — a crude oil
price shock. Brent crude surged to $110–117 per barrel,
far above the RBI's assumed baseline of around $70,
dramatically expanding India's dollar-denominated oil
import bill. Since India sources roughly 80% of its crude
requirements from overseas and pays in dollars, the
spike translated directly into surging dollar demand in the
domestic foreign exchange market, putting relentless
downward pressure on the rupee. Compounding this was
the behaviour of Foreign Institutional Investors, who
turned aggressive net sellers of Indian equities through
the month, repatriating an estimated $8–10 billion out of
the country and generating a sustained second wave of
dollar demand that the market struggled to absorb.
The global backdrop offered no relief. The US dollar index
traded near multi-month highs around 99–100, as the
Federal Reserve's higher-for-longer rate narrative drew
capital into dollar assets and away from emerging market
currencies. In this environment, the rupee was not uniquely
weak — most EM currencies underperformed — but India's
specific exposure to oil imports and the scale of FII outflows
made the pressure more acute than in peer economies.
The RBI intervened repeatedly and visibly, selling dollars
through state-owned banks ahead of market open to prevent
disorderly falls, tightening speculative position limits on
banks' net open foreign exchange exposure, and allowing
forex reserves to fall by approximately $30–31 billion over
the month to fund its market operations. These interventions
were not without effect — they meaningfully reduced
intraday volatility on several occasions, delivered sharp
one-day rupee recoveries after record-low breaches, and
prevented what could have been a more disorderly free fall.
However, they could not alter the fundamental direction of
travel. Each RBI-supported bounce was quickly eroded by
fresh oil-linked dollar demand and FII outflow pressure,
making the central bank's support look more like a series of
controlled pauses than a genuine floor.
The rupee's slide fed back into the broader economy and
markets — worsening the import inflation outlook,
complicating the RBI's room to cut rates aggressively, and
amplifying the Sensex and Nifty corrections through the FII
selling channel. Strategists were broadly aligned in their
assessment: durable rupee stabilisation will require lower
crude prices and a return of foreign inflows — not simply
more intervention, which is already proving costly in terms of
reserve depletion and policy flexibility.
