RBI Can Cushion the Rupee, But West Asia Still Holds the Trigger

The Reserve Bank of India’s latest measures to bolster foreign-exchange inflows have bought the rupee some breathing room. But they have not altered the fundamental reality confronting the currency: the rupee’s trajectory is currently being dictated more by geopolitics than by domestic policy.

The central bank’s package, ranging from a reduction in the export proceeds realisation period to measures aimed at encouraging capital inflows, addresses a growing concern over India’s external balances. Estimates suggest that without these interventions, India’s balance of payments could have slipped into a deficit exceeding $50 billion, an uncomfortable position for an economy that has relied on capital inflows to finance its current account gap.

The market’s initial reaction has been encouraging. 

The rupee has recovered from its record lows, and foreign investors are expected to show renewed interest in government securities. Faster repatriation of export earnings should also improve dollar liquidity in the domestic market, providing a more durable source of support than volatile portfolio flows.

Consequently, expectations for the rupee have improved, with expectations that instead of drifting towards 97–100 per dollar, the currency could now stabilise in a 94–96 range over the near term. But that range should not be mistaken for a new equilibrium. It is a truce line, not a victory line, one that will hold only if the geopolitical premium in oil and the dollar begins to fade.

False Comfort
There is, however, a less sanguine reading of the same developments. The argument is that the market may be too quick to treat the RBI’s measures as a durable rupee-support package when they may merely shift the pressure elsewhere.

If the expected foreign-currency flows materialise, the forward book will expand further, leaving the central bank with a larger future obligation to manage. That may ease spot-market pressure for now, but it does not eliminate the underlying external vulnerability. It simply changes its timing and accounting.

The largest uncertainty remains in West Asia. Much depends on how the conflict evolves, whether the Strait of Hormuz remains secure, and how post-war energy disruptions are priced. Even in a benign scenario, the full impact of higher energy costs may not yet be reflected in India’s external balances. A Brent crude price of $75 a barrel may still leave India facing a balance-of-payments deficit, leaving little room for comfort.

This is why the 94–96 range should be treated cautiously. 

The more bearish view is that the rupee may still move towards 98 per dollar if oil risk persists, capital flows disappoint, or markets are forced to reprice the external deficit. In that reading, the RBI’s measures are useful but not decisive unless accompanied by a stronger monetary-policy signal. Without higher rates and a restoration of credibility, the argument goes, the rupee may only be enjoying a temporary reprieve before a sharper adjustment.

Oil Shock
The bulk of the rupee’s weakness this year has not originated from domestic economic imbalances. The currency has fallen sharply in 2026, and a large part of that decline can be traced to the escalation of tensions in West Asia. By comparison, the positive impact of the RBI’s latest measures has so far amounted to only a fraction of that move.

This underscores a broader shift in currency markets. Traditional drivers such as interest-rate differentials, capital-account measures and balance-of-payments management remain important, but geopolitical risk has increasingly become the dominant force shaping exchange-rate movements.

The risk is not merely that oil prices spike for a few sessions. The larger concern is that energy markets begin to price a longer period of disruption, higher freight and insurance costs, rerouted flows, and a persistent security premium around the Gulf. If that happens, the rupee’s problem will not be one of sentiment alone. It will become a question of how quickly India’s external deficit widens and how much of that pressure the RBI is willing to absorb.

Meanwhile, another risk looms on the horizon. 

If developed-market central banks maintain tighter monetary policy, foreign capital flows into emerging markets could come under renewed pressure. In that environment, even a stronger domestic policy response may struggle to offset external headwinds.

The RBI has demonstrated that it can ease pressure on the rupee and strengthen India’s external position. What it cannot do is control the geopolitical events and energy-market dynamics that are increasingly determining the currency’s fate.

For now, the rupee has been given a cushion, not a cure. Mumbai can build buffers, pull forward dollar flows and calm the market’s immediate nerves. But whether the currency stabilises near 94–96 or is forced to test 98 and beyond will depend less on domestic optics and more on how West Asia, oil and global capital flows evolve from here.