War is destructive. It definitely causes unimaginably large losses to the warring nations. But did anyone expect a nation miles away from the warring nations to be affected so badly? The ongoing US-Iran war’s worst impacts have reached as far as the Indian economy. For the first time in history, the Indian rupee dropped to a record low of 96.90 against the US Dollar. This is never the result of one factor. The country has been pushed to this situation due to multiple global and domestic factors.
Geopolitical Tensions
The west asian war has significantly affected major trade routes, prices of goods and investment habits all over the world. If the current situation persists, it could lead to the disruption of everyday lives in every household. Job uncertainty, transportation difficulties, and so on all eventually lead to financial struggles. According to data, the rupee has fallen by nearly 5% ever since the start of the west asian conflict. This makes the overall depreciation by around 6.5% in 2026 so far. This makes the Indian rupee the most vulnerable victim amidst geopolitical tensions.
Heavy Dependence on Oil Imports
India is a nation that heavily depends on crude oil for its day-to-day activities. In fact, for the smooth functioning of India, from industries to households, crude oil is crucial. The surge in oil prices is directly proportional to the surge in the economic pressure of the nation. Among the other imports, it is on this oil that India spends its money largely. It accounts for around 22% of the country’s total imports. This pressures the Indian economy, which eventually leads to the spending of its foreign exchange reserves. Depletion of the reserves will also pose a threat to the nation in times of emergency.
Massive Foreign Investor Outflows
According to recent reports, $18.5 billion was withdrawn by Foreign portfolio investors. As a result of this, there was a massive rise in the value of US Dollars, at the same time a huge downfall for the Indian rupee. This is because the investors, after withdrawing their bonds, look to convert them into US Dollars for their reliability. While foreign investment supports economic stability to a great extent, it also poses a threat to the same extent during times of crisis. India, despite its fast-growing economy, has to depend on these foreign inflows to maintain stability.
Current Account Deficit
India’s exports are way less than its imports. This means it spends more than its earnings. When expenses exceed the earnings, the nation would indeed struggle.
In such scenarios, the nation can opt for any one of these two options. First, it can start exporting more. For this, production has to be intensified with a larger workforce. At the same time, focus is necessary for marketing strategies in the importing countries. Secondly, India can save its money by reducing its imports. This is the reason people are advised to spend less on gold and transportation for the time being to reduce the demand. The second method proves more efficient and credible, as the first can take years to be achieved.
Strict Market Regulation & Shallow Financial Markets
Though the Indian economy and its financial markets are considered fast-growing and emerging, it stands behind globally. Amidst financial giants like the US dollar, the Indian rupee gets affected very quickly. To balance this, strict rules and regulations have been implemented. But Investment and financial experts warn that such intense regulations can also weaken the rupee. This could be one of the depriving factors. The same is the case with the widening gap between onshore and offshore currency markets. Unlike the US and Chinese currencies, which are considered ‘deep’ due to their global demand and trade requirements, the Indian rupee is considered ‘shallow’, making it less demanding in the global market. Even India depends on the US dollar for the majority of its imports.
RBI's Hands-Off Policy
The Reserve Bank of India, well aware that too many regulations could affect the economy, intervenes in times of emergencies. It now focuses on the Hands-off policy, where it lets the market determine the exchange rate.
This is done for two main reasons. The first one is for the smooth functioning of the market. It does not burden the currency but only offers a temporary solution. Secondly, it prevents panic in the entire nation. It also saves the nation from the complete depreciation of its currency. The foreign exchange reserve limits curb the long-term solution. For this, deeper intervention towards imports, better manufacturing, etc., has to be focused.
India’s population, in fact, requires a more stable and secure economic condition. While providing peace to its citizens, it can soar towards a stable growth in a very quick span of time. However, the most affected are always the common people in the nation. Middle-class families struggle to lead their day-to-day lives. Fear of the future also prevails due to rising global tensions.
References