OPEC-driven crude production and supply catalyse US Dollar domination despite its hold on merely 28 percent of global crude production and trade. For Bharat, import of crude for OPEC is a commercial expediency due to supply distances, diplomatic pressures and locational advantages. — Vinod Johri
Bharat is counted among the world’s strongest economies, and its currency is a barometer of global trade health and geopolitical stability. Recent disruptions in crude supply from the Middle East and West Asia pursuant Iran-US war for past two months and prior to this war, the tariffs imposed by the US President Donald Trump since he took an oath of the Presidential office, have deepened the rupee devaluation crisis. Since Bharat imports nearly 80% of its crude oil and pays in dollars, rising oil prices increase dollar demand, weakening the rupee.
The Bharatiya rupee has been trending downward against the US dollar, recently hitting record lows near 95.40, driven by a strong US dollar, rising global oil prices, significant capital outflows by Foreign Institutional Investors (FIIs), and a persistent trade deficit. The Federal Reserve’s interest rate policy keeps dollar-denominated assets attractive, leading to capital flight from emerging markets like India.
Not only Bharatiya rupee, the major currencies have undergone devaluation in these crises and even the US Dollar has seen erosion, the consequences of which are clearly seen in the United States. The Reserve Bank of India and the Union Government are fully aware of this currency dynamics but taking extremely cautious approach so as not to disrupt the imports and international trade. Some schools of thoughts are not worried about it and take it as a normal course correction. However, such devaluation does impact growth of economy, inflationary pressures and outflow of foreign investments due to weak sentiments of the economy. While the US President Donald Trump does not consider it a crisis in his own country but his contentment is encouraged by the increasing US dollar domination globally.
The fundamental truth is that currency values are determined by the relative cost of money. Investors always hunt for the highest risk-adjusted return, which creates a direct link between the policy rates of the Reserve Bank of India (RBI) and the US Federal Reserve.
When the rupee comes under pressure against the US dollar or when the former hits a record low against the latter, investors, businesses, and the public start panicking. Because, it is a direct burden on the consumption. Massive crude oil import bills create a persistent demand for the dollar over local currency. Global risk-off sentiment prompts foreign investors to liquidate Indian assets for safer dollars.
Bharat’s dependence on imports is evident from its crude oil buying trend. Around 80% of India’s crude oil demand is met by the global markets. Oil is priced internationally in US dollars. As a consequence, any spike in energy prices implies a greater volume of dollars needs to be purchased. So, oil-led depreciation is a major factor of the pressure on the rupee. Another important factor is the trade deficit. India’s consistent merchandise trade deficit, where imports outpace exports, can be settled only if Bharatiya importers sell rupees to buy dollars. This constant bid for the US dollar keeps the local currency perpetually undervalued.
Foreign portfolio investment (FPI) is liquid money pumped into stocks and bonds. This transient capital is extremely sensitive to global risk appetite and macroeconomic stability. Capital flight happens during periods of global uncertainty or due to the potential for better returns elsewhere. Under such circumstances, foreign institutional investors mostly turn net sellers in the Indian markets. They liquidate their holdings in Bharatiya stocks and bonds; they sell rupees and buy dollars, causing the local currency to weaken. The risk-off sentiment often drives the rupee’s devaluation. During global recessionary fears or conflict, almost as instinct investors flee to safe havens in the US financial system. Over years, the US dollar has earned the reputation of the world’s primary safe asset. When FPIs sell Bharatiya holdings, they convert their rupee proceeds into dollars to repatriate funds. This flight bolsters the dollar demand and thus the Dollar Index (DXY) while devaluing emerging market currencies like the rupee, regardless of Bharat’s internal economic strength. The premium for holding Bharatiya debt has to be attractive enough to compensate for the perceived risk of an emerging market. If it’s not large, global funds (held by FPIs) will fly back to the US from Bharat. This situation creates perpetual pressure on the rupee.
A falling rupee is a bummer for travellers and also acts as a silent cost-driver for Indian industry through imported inflation. All essential raw materials become dearer. Companies in the Fast-Moving Consumer Goods (FMCG) sector reel from rising costs for inputs like palm oil and packaging materials, which are traded in dollars. A sliding rupee forces these companies to either absorb margin hits or pass the costs to consumers through price increases. The domestic automotive production is steadily increasing, but that is not helping Bharat wean off imported components. Many sectors still purchase components like semiconductors and specialised steel from other countries. A depreciating rupee hikes the landed cost of these parts. As a ripple effect, ex-showroom prices of vehicles and consumer electronics also edge up.
Unlike volatile FPI, foreign direct investment (FDI) acts as a stabiliser. Long-term FDI is like a structural counter-weight. Robust FDI inflows push up the dollar supply in the local market. This helps mitigate the dent caused by short-term capital outflows.
Currency depreciation is a challenge, but one cannot deny the clear commercial and investment opportunities that it creates for others. Export-oriented sectors have little cause to worry about. Businesses in information technology (IT) and pharmaceuticals earn majorly in dollars but incur most of their costs in rupees. A weaker rupee implies higher margins for these companies, when converting their foreign earnings back into local currency. International diversification pays off most of the time. Investors holding foreign equities or global mutual funds benefit twice during a rupee slide — once from the growth of the asset itself and again from the favourable exchange rate upon conversion. NRI remittances are influenced by falling rupee. For the Bharatiya diaspora, a falling rupee is a rising purchasing power of their foreign income within Bharat. This leads to a surge in inward remittances to take advantage of the higher conversion yield. As foreign travel and education become more expensive in rupee terms, domestic tourism and local educational institutions see a boost in demand, benefiting businesses within these sectors.
As of early 2026, the Bharat Government and the Reserve Bank of India (RBI) maintain a market-determined exchange rate policy, focusing on managing volatility rather than defending a specific, fixed price level for the Indian Rupee (INR) against the US Dollar (USD). Amidst a record depreciation of the rupee—touching lows near Rs. 95 in March 2026—the government’s approach is to allow gradual adjustment while curbing excessive speculation.
The RBI does not target a specific rate or band. Instead, allowing the rupee to depreciate gradually to reflect economic fundamentals, such as higher inflation differentials relative to the US. The RBI intervenes in the foreign exchange market to curb “undue volatility,” selling dollars from its substantial reserves to absorb excess demand. In early 2026, the RBI was active in both spot and forward markets. Bharat maintains high forex reserves (around US$ 698 billion as of Sep 2025, with continued active management in 2026 to act as a shield, ensuring orderly market functioning and meeting external obligations. The government views the depreciation as partly driven by trade deficits and US tariffs on Indian exports. The approach includes attempting to boost export competitiveness via a weaker currency, while supporting industries that rely on imports. To deter speculative attacks, the RBI has been using a more varied approach, changing the timing, method, and size of its interventions. Finance Minister Nirmala Sitharaman stated that the rupee’s decline was not specific to India but was a common trend among Emerging Market (EM) currencies, emphasizing that the situation is managed and monitored.
Contrary to popular notion, the RBI does not target a specific exchange rate level. Its role is to ensure the rupee’s movement is not erratic or disorderly. It is important to keep the economy in a safe space so that Bharat can meet its external obligations even during periods of high dollar demand.
The depreciation of the rupee is a core characteristic of an energy-dependent, emerging economy. Seasoned investors always monitor the US Fed policy. Shifts in US interest rates remain the single largest driver of global dollar strength and global energy prices. Brent crude levels are a primary indicator of the pressure on Bharat’s trade balance. Last, but as crucial as the previous two, are institutional inflows. The inclusion of Bharatiya debt in global indices has acted like a structural cushion. It supports steady capital inflows, helping to partly offset trade-led depreciation pressures.
Whatever be the factors behind rupee devaluation, it is imperative to contain this trend and not allow it further in tune with the global pressures, mainly crude oil supply crisis. OPEC-driven crude production and supply catalyse US Dollar domination despite its hold on merely 28 percent of global crude production and trade. For Bharat, import of crude for OPEC is a commercial expediency due to supply distances, diplomatic pressures and locational advantages. Reduced domestic demand of petrol, diesel, LPG and optimum capacity utilisation of renewable sources, electric vehicles, nuclear, solar and wind energy for domestic consumption, compulsory usage of EVs in the Government sector and mandatory installations of solar energy installations in community and Government and corporate residential complexes and offices will certainly reduce import burden of crude oil imports.
(The author is former Additional Commissioner of Income Tax, Delhi)
