India's rupee hit a fresh record low on Monday, closing at 96.35 against the US dollar. The rupee has now fallen around 7 per cent in 2026, and has been among the worst-performing currencies in Asia.

This is despite the Reserve Bank of India periodically intervening to stabilise the rupee, and the government also announcing measures such as raising duty on gold to slow down imports.

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What is pulling the rupee down?

Typically, the rupee does depreciate around 4 per cent on average each year due to the country's persistent trade deficit. As imports continue to exceed exports, there is always more demand for US dollars. This year, the decline has been significantly faster due to two key reasons.

The conflict in West Asia sent oil prices soaring to over $100 a barrel. Given India is dependent on imports for much of its oil requirements, the import bill has seen a significant increase, which means more demand for dollars and, in turn, pressure on the rupee.

Foreign Portfolio Investors (FPIs) have also been heavily selling in the Indian equity market, as they remain worried over taking fresh bets, amid the current geopolitical uncertainty, and the impact the crude oil price shock and supply chain disruptions will have on India.

Also, as artificial intelligence (AI) has gained traction, a lot of investor money has flown into markets like Taiwan, South Korea and the USA, chasing such AI-related investment opportunities. India has missed out, given that it has hardly any listed companies in this space. Importantly, at the same time, sentiments on India’s software services companies have turned bearish as worries rise on the kind of impact AI will have on their business models.

In 2026, till May 15, FPIs had pulled out close to Rs 2.17 lakh crore from India’s equity market, which is more than the Rs 1.66 lakh crore they sold through the entire 2025. FPIs selling Indian stocks and pulling out dollars creates further pressure on the rupee.

There have also been pressures on the foreign direct investment front; while gross FDI has been strong, net FDI inflows have been weak, as more Indian firms invest abroad, and foreign investors repatriate capital.

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What has been done to stabilise the rupee?

The Reserve Bank of India has been, from time to time, intervening in the foreign exchange market by selling dollars and buying rupees.

In March this year, the RBI directed authorised dealers to ensure that their net open rupee positions in the onshore deliverable market would be maintained within $100 million at the end of each business day. The idea was that banks would wind up any excess forex positions, in turn creating additional dollar supply, and strengthening the rupee.

Then, on April 1, it took more measures to shore up the rupee. It barred banks from offering rupee non-deliverable forward (NDF) contracts to corporate clients. The measure was partially relaxed recently. NDF is a financial derivative used to hedge or speculate on currency exchange rates. The measures announced on April 1 were later partially rolled back by the RBI.

The RBI measures helped pull back the rupee to some degree. However, with no signs of the conflict ending, and oil prices remaining on the Boil, the rupee resumed its decline in May. 

RBI Governor Sanjay Malhotra has been clear that the central bank would only intervene to curb any excessive volatility and speculation, and that it does not target any specific level.

The government last week raised the duty on gold as it looked to curb the import of the precious metal.

Much of India's gold demand is met through imports, paid for in dollars, and that also pressurises the rupee. Petrol and diesel prices too have been raised by Rs 3 last week, amid mounting under-recoveries of oil companies. What effect these measures will have on demand and in turn the rupee, will have to be seen in the coming weeks and months. 

Will the rupee slip towards 100 this year?

A lot of this depends on whether and when the conflict in West Asia stops, and that is anybody’s guess. However, even if the war were to end, oil prices may not cool immediately, as some production facilities have been hit in the war and may take time to be restored.

Experts warn that should the war drag on for a few more months, it will continue to hurt big importers like India. Not only will the rupee remain under pressure, but the current account as well as the fiscal deficit are expected to widen.

"In the absence of an immediate settlement in the Iran conflict, the rupee touching the 97-98 range is very much on the cards,” Devang Shah, head of fixed income at Axis Mutual Fund, told BT.

He said that the RBI has already intervened significantly from a currency management perspective, and so doesn't see too much room for further intervention going ahead. 

"At this stage, the central bank may be better off allowing the currency to find its own equilibrium,” he stated.

According to Swayamsiddha Panda of Ambit Capital, the rupee could still depreciate to 100-101.5 by the end of the current financial year ending March 2027.

“FDI + FII flows, which averaged $3.7 billion/month over FY15-24, sharply reversed to an outflow of $0.5 billion since FY25. Similarly, FDI gross inflows in January 2026 and February 2026 have remained strong, averaging $7.3 billion/month, but outflows (disinvestments and outward FDI) have also been elevated, averaging $5.7 billion/month,” he noted.

Importantly, according to Panda, the RBI’s room to intervene is limited.

“While headline forex reserves are $690 billion, adjusting for $113 billion gold holdings and $103 billion in short positions leaves import cover at just 5.8 months, the lowest since 2014,” he stated.

Jateen Trivedi, VP research analyst – commodity and currency, LKP Securities, believes the broader trend for the rupee remains weak.

“India’s high dependence on imported crude is worsening sentiment, with Brent crude staying elevated amid ongoing uncertainty around the US-Iran conflict and Strait of Hormuz concerns,” he said.

Markets will be closely watching India’s strategic efforts to secure lower-cost oil and gas supplies to ease pressure on the import bill and forex reserves, he added.

Reversing FPI flows

While FPI selling in the equity market may not abate soon, given the global geopolitical uncertainty, there could be some possibility of FPI flows into India’s debt market increasing, more so if Indian government bonds get included in the Bloomberg Global Index. Bloomberg Index Services was earlier this year expected to include Indian debt in its Global Aggregate Index. However, that move was deferred.

In the last few days, there have been reports that the government may be looking to reduce the withholding tax rate on bonds to attract foreign investors.

“The review of the Bloomberg Aggregate Bond Index is coming up over the next couple of months and if there is some rationalisation in FPI taxation on debt investments, the probability of inclusion in the Bloomberg Global Aggregate Index goes up and one can potentially see inflows of $35-$40 billion if both things happen,” pointed Puneet Pal, head – fixed income, PGIM India Mutual Fund.

Inclusion of Indian government bonds in global indices would be the most effective route for attracting US dollar inflows, agreed Shah of Axis MF.