India’s soaring oil bill shows limits of RBI’s rupee defense

India’s heavy reliance on oil imports is straining the country’s current account deficit as the Iran war drags on, making it difficult for the central bank to steady the rupee despite the aggressive measures it’s taken so far to halt the slide.

The Reserve Bank of India took a dramatic step late last week to curb speculation in the foreign-exchange market and cushion the rupee as it slumped to record lows. The move provided only a temporary bump to the rupee on Monday, though, with the currency giving up most of its initial gains.

That’s largely a reflection of India’s dependence on oil, economists said, given the country is the third-largest crude importer in the world. On top of that, remittances from Indians working in the Gulf — estimated at almost 10 million — are likely to fall, reducing foreign inflows to the country.

Together, that’s widening the deficit on the current account, the broadest measure of a country’s trade in goods and services. With more foreign exchange flowing out of the country than is coming in, the currency is taking a beating.

“The problem is the pressure on the rupee is not just from speculators it comes from the real demand for dollars in the economy,” Abbas Keshvani, Asia Macro Strategy Director at RBC Capital Markets, said Monday in an interview on Bloomberg TV. “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.”

The current account deficit was expected to reach about 1% of GDP in the fiscal year ending in March. That may widen to 2.5% in the coming fiscal year, according to estimates from Standard Chartered Plc. Nomura Holdings Inc. economists estimate that for every 10% rise in the price of oil, the current account deficit would widen by around 0.4% of GDP.

The rupee, Asia’s worst-performing currency this year, jumped as much as 1.4% at Monday’s open after the RBI capped banks’ open positions, before reversing course to close at a fresh low of 94.8325 per dollar.

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.

The balance of payments includes the current account as well as the capital account and is the broadest measure of money flowing in and out of the economy.

Before the war, Gupta estimated India would post a balance of payments surplus of $10 billion. India had a surplus of $63.7 billion in fiscal 2024 and a deficit of $5 billion in fiscal 2025, according to data from the RBI.

“India’s balance of payment will be in deficit for the second successive year in this financial year — which has never happened before,” said Anubhuti Sahay, India economist at Standard Chartered. “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.

India may also face a capital account deficit this fiscal year as foreign investors flee emerging markets for safer havens, said Soumya Kanti Ghosh, group chief economic advisor of State Bank of India and a member of the Economic Advisory Council to the Prime Minister. “This has never happened since 1991,” Ghosh said.

Crude price pressures prompted Goldman Sachs Group economists led by Santanu Sengupta to cut India’s 2026 growth forecast to 5.9% last week, less than two weeks after lowering it to 6.5% from 7%.