Rupee Under Siege: RBI's Defence Weakens as Capital Flows Dry Up

The rupee hit a record closing low on Wednesday, and the Reserve Bank of India's efforts to defend it are running into hard limits. For three months now, the US-Iran war has kept oil prices elevated. At the same time, foreign investors have pulled nearly $20 billion from Indian equities in just the first four months of 2026—already exceeding the entire previous year's outflow. The combination is widening India's balance-of-payments deficit to levels not seen before, and analysts say the central bank's traditional tools may not be enough to hold the line.

The balance of payments—the broadest measure of money flowing into and out of the economy—is expected to slip into deficit for a third straight fiscal year. Kotak Mahindra Bank estimates the gap at $50 billion this year, compared to deficits of $39 billion and $5 billion in the two years prior. IDFC First Bank sees it reaching $40 billion to $50 billion, up from an estimated $35 billion the year before. These widening deficits reflect a fundamental shift: capital is no longer flowing in to offset India's import bill. Oil prices, now sustained at elevated levels due to the Strait of Hormuz closure, are making that import bill heavier. Foreign direct investment turned negative for six straight months before rebounding in February, a sign of hesitation among long-term investors.

The RBI has responded with aggressive intervention, selling dollars to support the rupee. But the central bank's room to maneuver is constrained. India's forex reserves stand at $703 billion, but a negative $78 billion forward book—reflecting future dollar obligations the RBI has already committed to—limits how much the bank can actually deploy. Gaura Sen Gupta, chief economist at IDFC First, noted that this large negative forward position makes it harder for the central bank to manage the impact of its currency market interventions. The rupee fell 0.3 percent to 94.85 on Wednesday, and multiple forecasters have lowered their expectations. BofA Securities has revised its mid-year forecast to 94 per dollar, down from 89. IDFC First sees the rupee weakening to the 95-96 range. Barclays has a year-end forecast of 96.80.

Rahul Bajoria, head of India economics research at BofA Securities India, said the fundamental balance-of-payments picture remains weak, meaning pressure on the rupee is likely to persist. "The RBI's steps do provide relief," he said, "but we do not know if their efficacy will remain the same over a longer period." This uncertainty reflects a deeper problem: the RBI's playbook—aggressive currency market intervention, forex reserve deployment—carries its own side effects and has limits. If oil prices average $85 to $90 a barrel through fiscal 2027, the central bank may need to look at broader measures: easing borrowing rules to attract dollar inflows, pushing exporters to repatriate earnings faster, or other structural changes.

Goldman Sachs this week lifted its oil-price forecasts due to the prolonged Strait of Hormuz closure, now seeing Brent crude averaging $90 a barrel in the fourth quarter, up from a previous $80 outlook. Soumya Kanti Ghosh, chief economic adviser at State Bank of India, wrote that a comprehensive set of measures is required. "The exchange rate cannot be construed as a shock-absorbing mechanism in perpetuity," he noted. The message is clear: the rupee's weakness is not a temporary currency fluctuation but a symptom of deeper external imbalances. Without a reversal in capital flows or a sharp drop in oil prices, India faces a prolonged period of rupee pressure and constrained policy flexibility.