Rupee Nears 97 Against Dollar: What’s Driving the Fall and How India Is Fighting Back

The Indian rupee has not had a moment's rest in 2026. Since January, it has shed close to 8% of its value against the US dollar, breaking its own record lows almost regularly.

On Wednesday morning, the rupee slumped to an all-time low of 96.90 against the dollar immediately after markets opened, the latest in a string of grim milestones that have made it, by most measures, the weakest major Asian currency this year.

What Driving the Fall

The single biggest culprit is oil. India imports close to 90% of its crude oil requirements, and these imports are largely paid for in US dollars. When oil prices rise, Indian refiners rush into the market to buy dollars, which drives up dollar demand and pushes the rupee down. Right now, oil prices are anything but calm. Brent crude futures are hovering near $110 per barrel, driven by the unresolved conflict involving Iran and shipping disruptions in the Strait of Hormuz.

The Iran also changed what traders expect the US Federal Reserve to do. Higher oil prices feed inflation, and inflation expectations have pushed markets to price in the possibility of Fed rate hikes — a dramatic reversal from earlier in the year, when a cut was widely expected. Reuters reported, this shift in Fed expectations has compounded pressure on the rupee by making US assets more attractive and pulling capital away from emerging markets like India.

Then there is the capital flight. Foreign portfolio investors have net sold more than $22bn in local assets since late February, a figure that has already surpassed outflows from previous cyclical downturns. When foreign investors sell Indian equities and bonds, they convert rupees into dollars before moving the money out, creating more selling pressure on an already battered currency.

The behavior of domestic market participants also not making things better. Dhiraj Nim, FX strategist and economist at ANZ, told Reuters, "Exporters are delaying conversion of proceeds, while importers are front-loading demand and hedging aggressively. The result is a persistent imbalance in FX flows that intervention alone struggles to offset."

RBI Spending Big

The Reserve Bank of India (RBI), as per reports, has been selling dollars through state-run banks for the past week and a half, with daily intervention estimated by bankers at somewhere between $800mn and $2bn

Analysts said the intervention happens in bursts rather than continuously through the session. Gaura Sen Gupta, chief economist at IDFC FIRST Bank, estimated the central bank sold around $5 billion in the first week of May alone, based on her calculations from reserve money data.

The intervention is working — but only up to a point. The rupee has been falling for 12 consecutive trading sessions, and the RBI's dollar sales have slowed the slide rather than reversed it, Reuters said. A disorderly crash would be far more damaging than a controlled descent, even a painful one.

Delhi’s Toolkit

Beyond the RBI, the Indian government has moved on several fronts. The most striking step came on May 13, when it more than doubled import taxes on gold and silver to about 15% from 6%, imposing a 10% basic customs duty alongside a 5% agriculture infrastructure and development levy.

India is the world's second-largest consumer of gold, and gold imports represent a significant drain on the country's dollar reserves. The government has also tightened the import rules further — bullion imports of a maximum 100 kgs will now be subject to advance authorisation, and subsequent imports will only be issued once 50% of the previous lot has been exported, Bloomberg reported.

Silver has been brought into the net too. From May 16, high-purity silver bars of 99.9% purity or higher were reclassified from "Free" to "Restricted" under India's trade policy, meaning more than 90% of silver bar imports now require a government-issued licence. The move also targeted a specific arbitrage loophole — traders had been exploiting the India-UAE free trade agreement to import silver at preferential rates, undercutting the standard duty structure. Delhi has now closed that gap.

On 15 May, India also hiked petrol and diesel prices by around ₹3 per litre — the first increase for retail consumers in four years. The move is a signal that the government is no longer willing to absorb the full cost of subsidised fuel at a time when its own finances are under pressure from a record trade deficit and a weakening currency.

The Economic Times reported that the government is currently also The reviewing imports of non-essential items and goods where import dependence is low, among other measures to curtail the country's import bill and encourage domestic capacity creation. The government could also impose higher duties or selective restrictions to curb such imports.

What’s Next?

There is no straight away answer to this question. The rupee's fate is tied to geopolitical events — specifically, whether the Iran conflict escalates, what happens to oil supply routes through the Strait of Hormuz, and how the Federal Reserve responds. None of those are variables New Delhi can control.

What India can control is how it manages its forex reserves, its import bill, and market confidence. The RBI has made clear it will keep defending the currency, even if the defence is costly. Sen Gupta at IDFC FIRST Bank told Reuters she expects further steps to address current account pressures and to bolster capital flows, particularly after the central bank cracked down on arbitrage trades that had been amplifying pressure on the rupee.

At $120 per barrel crude, India's annualised import bill escalates dramatically, placing sustained upward pressure on the current account deficit and the rupee simultaneously. A weaker rupee then increases the rupee cost of crude imports even at a constant dollar price — widening the trade deficit further, which puts additional pressure on the currency. It is a loop that is genuinely difficult to break without a shift in external conditions.