At first glance, the rupee is staging a recovery. India’s battered currency has gained around 1.5 per cent since March 27, making it the best-performing currency in Asia, according to Bloomberg data.

However, the recent bounce belies vulnerabilities in India’s economy that have been exacerbated by the energy shock emanating from the war in Iran. India is one of the most exposed among Asia’s leading economies, importing 90 per cent of its oil and more than half its liquefied petroleum gas. According to Nomura, the share of India’s energy imports from the Middle East is one of the highest in the region.

The surge in oil and gas prices caused by the effective closure of the Strait of Hormuz means India must buy more foreign currency to pay for its energy imports. This has put the rupee under more strain, fuelling inflation and causing the country’s current account deficit to widen. In a report on April 6, Citigroup said the energy shock “upended the benign ‘goldilocks’ macro backdrop for India”.

Yet even before the war broke out, India’s economy and markets were losing some of their appeal, especially in the view of foreign investors. Last year, global funds sold a record US$18.8 billion of Indian stocks because of concerns about high valuations, punitive US tariffs on Indian goods, slower growth in corporate earnings and doubts about the underpinnings and sustainability of the economy’s rapid expansion.

The selling pressure has intensified this year. In March alone, foreign investors sold US$14.2 billion of Indian equities, accounting for more than a quarter of the total net foreign outflows from the stock markets of Asia’s developing economies, according to data from the Institute of International Finance.

The toxic combination of a further decline in the rupee, higher inflation and a deteriorating balance of payments position evokes memories of the severe financial strains that led to a dramatic sell-off in 2013. At that time, India was singled out as one of the members of the so-called fragile five group of vulnerable emerging markets.