Introduction: Rupee Falls Further Against a Rising Dollar
The dollar is running higher, the rupee is gasping for breath, and our wallets are silently watching it all happen. If you don’t know the current value of $1, here’s the reality — the discussion has now reached around ₹96.25, and the biggest fear is that if the dollar continues rising at this pace, it could soon cross the ₹100 mark.
The big question is: what happens if the rupee’s fall does not stop? Fuel prices are already high, and India buys crude oil in dollars. If the dollar becomes more expensive, oil prices will rise even further. Together, both are putting enormous pressure on the savings and bank balances of ordinary people.
But the deeper question is this: is expensive oil the only reason behind the dollar’s surge? Is the weakening rupee only a result of the Iran-US conflict, or are there other hidden factors playing a role in this story?
In just one and a half years, the dollar has become nearly ₹10 more expensive. Some experts have even argued that the rupee’s value was being allowed to weaken deliberately. But now the situation appears to be slipping out of control.
The Reserve Bank of India has been continuously selling dollars in the market in an attempt to stabilize the rupee, but the results remain negligible. This raises another major question — did the government react too late? Today, we will try to find answers to all these questions.
Hello, I’m Anurag Tiwari, and you have started reading Business Connect Magazine.
Why is the Rupee falling? Understanding the Trade Deficit
The dollar has now crossed the ₹96 mark. By the time the markets closed today, the rupee had fallen by another 54 paise, taking the exchange rate to nearly ₹96.25 per dollar. The dollar now seems to be eyeing the ₹100 level.
But the real question is not just why the rupee is falling. The bigger question is this: despite being the world’s sixth-largest economy, why does India’s currency always come under pressure during every major global crisis? Why does the rupee continue to weaken?
The truth is that there is no single reason behind it. A combination of factors — the global economic system, India’s dependence on imports, America’s economic dominance, and the politics of oil — all work together to strengthen the dollar and weaken the rupee.
Let’s understand this step by step. Why is the rupee weakening, and more importantly, why are the current conditions being considered so serious? Why are experts warning that the dollar could even cross ₹100?
One of the biggest reasons is India’s import-export imbalance. What we buy from other countries is called imports, and what we sell abroad is exports. If exports are higher than imports, the value of the rupee rises because more dollars enter the country than leave it.
But in India’s case, the opposite happens. We buy more and sell less. In simple terms, we run a loss in trade, and this is known as the trade deficit.
The crisis in West Asia has disrupted global trade and created supply chain problems worldwide. Despite these challenges, India’s merchandise exports touched a four-year high on a monthly basis. In April, India exported goods worth $43.56 billion, which is roughly ₹4.18 lakh crore.
However, there is little reason to celebrate because imports were much higher. India’s merchandise imports stood at nearly $71.94 billion, or around ₹6.91 lakh crore. As a result, India’s trade deficit for April widened to almost $28 billion.
Another important question is: where are most of these dollars being spent? According to a report, gold imports in April 2026 rose by nearly 81% compared to last year. India imported gold worth around ₹53,200 crore. This is one of the reasons Prime Minister Narendra Modi appealed to people to avoid unnecessary gold purchases.
Silver imports also surged sharply, rising by nearly 157% to around ₹3,905 crore.
Petroleum and crude oil imports may have declined by almost 10% compared to last year because of supply disruptions linked to regional conflicts, but due to high crude prices, the total oil import bill still stood at nearly $18.6 billion, or around ₹1.77 lakh crore.
And it is not just oil, gold, or silver driving up the import bill. Even excluding petroleum and gems & jewellery, India’s imports in April 2026 rose to nearly $45 billion compared to $39 billion in April 2025.
Sectors such as iron, steel, chemicals, and vegetable oils have all contributed significantly to the rise in imports. Still, oil remains the single biggest factor. India imports nearly 85–90% of its oil requirements, and all of these purchases are made in dollars.
At present, Brent crude is trading around $109 per barrel, while WTI crude is near $104 per barrel. High crude prices directly increase India’s trade deficit. And as we discussed earlier, a larger trade deficit means more dollars leaving the country. The more dollars India spends, the weaker the rupee becomes — and that impact is already visible.
Foreign Institutional Investors (FII) exiting the Indian market
After the economic reforms of 1991, India began to appear as an attractive destination for global investors. The losses created by our trade deficit were being balanced through foreign investments. This flow of money is what economists refer to as capital inflow or capital gains.
But what is the condition of those capital inflows today? The picture is far from encouraging. India tried to create an environment that would attract foreign investors, but the opposite seems to be happening now.
Foreign Institutional Investors (FIIs) are not only avoiding fresh investments in India, they are also pulling out the money they had already invested — and this trend has continued for months.
In 2025 alone, foreign investors withdrew nearly ₹1.6 lakh crore from the Indian stock market, marking one of the biggest annual sell-offs in recent history. When 2026 began, there was hope that conditions would improve. Markets moved up and down, investors continued entering and exiting, and things initially seemed stable.
But after February 28, everything changed. The conflict between the United States and Iran escalated, and its impact was felt across the Indian economy as well. Investors began shifting towards safer and more stable destinations. Panic among foreign investors intensified the sell-off in Indian markets.
The situation has now become so serious that within just the first four months of 2026, foreign investors have already withdrawn nearly ₹1.92 lakh crore from Indian equities — more than the total amount pulled out during the entire year of 2025.
Data shows that this is the largest sell-off recorded in the first four months of any calendar year. And India is not alone. Several Asian economies, including South Korea and Taiwan, have also been affected. South Korea suffered the biggest blow, witnessing foreign outflows worth billions of dollars, while India and Taiwan followed closely behind.
Reports suggest that this selling trend actually began in September 2024. Analysts noted that the profits of Indian companies were no longer matching the soaring valuations of their shares. In simple terms, company earnings looked weak compared to stock prices, creating uncertainty among investors. Since then, the cycle of withdrawal has continued.
One major reason behind the outflow is undoubtedly the instability in West Asia. The ongoing conflict involves several global powers, and uncertainty remains extremely high. Investors tend to avoid risks during times of war and look for what are called “safe havens” — markets and assets considered more stable.
But if we step back and examine the rupee-dollar story over a longer period, another reality becomes clear. In the last four years, the dollar has strengthened by more than ₹20 against the rupee, and in just the last one-and-a-half years, it has gained nearly ₹10.
This means the current Middle East crisis alone cannot explain the rupee’s weakness. The rupee was already under pressure long before the conflict intensified. The war may have acted as a trigger, but it is not the only cause.
A simple analogy explains it well: imagine a wall already weakened by termites. When an earthquake strikes, cracks begin to appear. The earthquake may trigger the damage, but the weakness already existed within the structure.
Similarly, the deeper structural problem in India’s economy is that we import far more than we export. We spend more dollars buying goods from abroad than we earn by selling our products and services globally.
For example, if India spends $100 importing goods but earns only $88 through exports, there is a $12 gap. This gap is known as the Current Account Deficit (CAD).
For years, India managed this deficit through foreign direct investment (FDI) and stock market investments by foreign institutional investors (FIIs). But now, even those supporting inflows are weakening.
So India currently faces a double challenge:
- The country already spends more dollars than it earns.
- At the same time, foreign investors are withdrawing money instead of bringing fresh capital into the country.
And when more dollars leave the country, the dollar naturally becomes more expensive. That is why many economists argue that the Middle East conflict is merely a trigger, not the core issue. The real structural problem is India’s dependence on dollar spending while its dollar earnings remain comparatively weak.
That is the central challenge behind the dollar’s rapid march toward the ₹100 mark.
RBI’s interventions and challenges to stabilize the Rupee
The Reserve Bank of India (RBI) has also taken several steps to control the situation. Before the conflict escalated, India’s foreign exchange reserves stood at nearly $728 billion. That figure has now fallen to around $690 billion — a decline of almost $38 billion, or nearly ₹3.61 lakh crore.
What is even more significant is that nearly $28 billion of this decline happened in March alone. This clearly shows the scale at which the RBI has intervened in the currency market to stabilize the rupee.
Despite spending such massive amounts, the RBI has made one thing clear: it is not trying to defend the rupee at any fixed exchange rate. Its primary objective is only to prevent excessive volatility, not to lock the rupee at a particular level against the dollar.
At present, India still holds enough foreign exchange reserves to cover nearly 11 months of imports. However, the speed at which these reserves are declining has raised serious concerns about how long the RBI can continue intervening at this scale.
At the same time, some economists are warning that the dollar could rise to ₹110, while a few are even predicting higher levels. Naturally, this raises another major question — is it becoming increasingly difficult for the rupee to recover? Has the situation started slipping out of the government’s control?
Experts say the fear of the dollar touching the psychologically important ₹100 mark is real. That is exactly why both the RBI and the government are trying to reduce India’s dollar outflow.
However, many major institutions and brokerage houses do not believe the dollar will necessarily rise to ₹110 or ₹120. In fact, several market experts argue that if foreign investors return to Indian markets, if FII inflows improve again, or if India successfully finalizes trade agreements with the United States and attracts stronger FDI, then the dollar — currently around ₹96 — could even fall back towards ₹90 or perhaps ₹86.
The key point is that the RBI is unlikely to allow the rupee to collapse uncontrollably.
This is important to understand because the RBI has historically intervened whenever the currency market becomes too unstable. If the dollar were left entirely to market forces and allowed to surge unchecked toward ₹110 or ₹120, it could create widespread economic panic. Inflation would rise sharply, and everyday essentials would become significantly more expensive.
India imports most of its crude oil in dollars. So if the dollar strengthens dramatically, petrol and diesel prices would rise even further. That is why the RBI repeatedly steps into the currency market.
Since the conflict began and pressure on the rupee increased, the RBI has been selling dollars from its foreign exchange reserves into the market. By increasing the supply of dollars, the central bank tries to prevent the dollar’s price from rising too rapidly.
Still, it would be difficult to call these efforts completely successful because since the crisis intensified, the rupee has already weakened by nearly ₹6.
Even so, both the RBI and the Indian government are expected to continue resisting any uncontrolled fall in the rupee, because a sharper decline could push the economy into an even deeper crisis.
Meanwhile, discussions are also underway about new measures to attract foreign investors back into India, including making Indian government bonds more attractive for global investment.
Discussions and debate surrounding Withholding Tax
There is now serious discussion around reducing — or even completely removing — the tax imposed on interest earned by foreign investors from Indian government and corporate bonds. In technical terms, this is known as the withholding tax.
Whenever a foreign investor puts money into Indian bonds, they earn interest on that investment. But before the investor receives the payment, the Indian government deducts a portion as withholding tax. Currently, India imposes a 20% withholding tax, which is significantly higher than many other countries.
For example, if a foreign investor earns ₹100 as interest from Indian bonds, a 20% withholding tax means they finally receive only ₹80. In other words, investors do not get the full return on their investment because the government deducts the tax at the source itself.
Until 2023, there was a concessional tax rate of 5% on certain foreign bond investments, but that benefit has now ended. Reports suggest that policymakers are once again debating whether reducing or removing this tax could help attract foreign capital back into India.
However, officials are also divided on whether such a move would truly work, especially at a time when interest rates in the United States remain high and global money continues flowing toward safer American assets.
At the same time, another debate has intensified: did the government delay taking the necessary corrective steps?
For nearly the last two years, some experts had argued that the government was intentionally allowing the rupee to weaken gradually. But now that stabilizing the currency appears increasingly difficult, the burden seems to be shifting toward ordinary citizens. People are being advised to reduce gold purchases, avoid unnecessary foreign travel, and limit fuel consumption.
This naturally raises a major question — did the government react too late? And will the measures now being suggested to the public actually make a meaningful difference?
Economists argue that some of India’s core problems are structural and cannot be solved overnight. India imports far more than it exports, meaning the country spends more dollars than it earns. No single government can eliminate this imbalance immediately.
The situation will improve only when India creates products or services that the world demands on a much larger scale. Until then, the pressure on the rupee is likely to continue.
A major portion of India’s dollar spending goes toward oil imports. Around 85% of India’s oil requirement comes from abroad — and this dependence is not new. India simply does not produce enough crude oil domestically.
Gold is another major contributor. Out of every $100 India spends on imports, roughly $7–8 goes toward gold purchases, while nearly $26 is spent on crude oil. Together, oil and gold account for almost one-third of India’s import bill.
That is why policymakers are encouraging people to reduce unnecessary consumption of fuel and gold. Lower consumption could help India save dollars and reduce pressure on foreign exchange reserves.
But there is also a downside. If people sharply reduce spending and consumption, economic growth itself could slow down. Lower spending can weaken demand in the economy, which may eventually impact GDP growth.
The crisis has become more severe because global crude oil prices have risen sharply due to geopolitical tensions. Before the conflict escalated, oil prices were much lower, but now crude has crossed the $100-per-barrel mark again.
For now, India still has foreign exchange reserves sufficient to cover around 9–10 months of imports. But the bigger concern is what happens if the conflict drags on for another year and crude oil prices remain above $100 per barrel for an extended period. That is when the situation could become truly dangerous.
This is why calls for savings and cautious spending are becoming louder today. Policymakers fear that if action is delayed further and conditions worsen, the economic crisis could deepen significantly.
Now the key question is not just how far the rupee may fall, but how long this pressure will continue — and whether global conditions after the conflict will return to normal patterns, or whether India’s markets will witness an unexpected turnaround.
