The heavy dependence of oil imports has strained India’s current account deficit as the US-Iran war has dragged on. This has led the rupee to be vulnerable despite the Reserve Bank of India (RBI) carrying out aggressive measures to halt its slide.

The RBI’s step last week to curb speculation in the foreign-exchange market and cushion the rupee provided only a temporary bump to the rupee on Monday and it slumped to record lows after making initial gains, Bloomberg reported. 

Besides being the third-largest crude importer in the world, India has another problem at hand as the Iran war escalates. Remittances from an estimated 10 million Indians working in the Gulf are likely to fall, reducing foreign inflows to the country. These factors are widening the deficit on the current account. The rupee’s beating is also coming from the fact that the foreign exchange outflows are more than the inflows.

“The problem is the pressure on the rupee is not just from speculators it comes from the real demand for dollars in the economy,” Bloomberg quoted Abbas Keshvani, Asia Macro Strategy Director at RBC Capital Markets, as saying. “Even before all of this kicked off in the Middle East, India had a very wide trade deficit and that deficit is going to widen.”

India’s current account deficit is expected to reach about 1% of GDP in FY26. Standard Chartered expects that could widen to 2.5% in the next fiscal. Economists at Nomura estimate that for every 10% rise in the price of oil, the current account deficit would widen by around 0.4% of GDP.

Bloomberg Economics’ Abhishek Gupta estimates that under a pessimistic scenario involving an escalating conflict and a prolonged closure of the Strait of Hormuz, oil prices could average $125 in the fiscal year through March 2027. That could widen India’s balance-of-payments deficit by more than $130 billion, an unprecedented shock, he wrote in a note.

“India’s balance of payment will be in deficit for the second successive year in this financial year — which has never happened before,” Bloomberg quoted Anubhuti Sahay, India economist at Standard Chartered, as saying. The risk of a third year of balance of payment deficit has increased in the next financial year beginning April, adding to pressure on the rupee.