India’s foreign exchange market is experiencing heightened volatility as the ongoing West Asia conflict fuels crude oil price swings, weakens foreign fund inflows, and puts fresh pressure on the rupee. According to market experts, the Indian currency may breach 98 against the U.S. dollar if crude oil prices touch $120 per barrel in FY27.

The Indian rupee has already depreciated nearly 5% since the onset of geopolitical tensions in West Asia, hitting multiple record lows. According to a report by CareEdge Ratings, the currency’s persistent weakness is evident in its 11% depreciation over the past year, of which 4.7% has occurred since the start of the U.S.-Israel-Iran conflict.

The local currency touched a fresh all-time low of 95.63 against the U.S. dollar on May 12, amid a sustained spike in crude oil prices, which remained above $105 per barrel.

The report noted that escalation in West Asia has increased demand for safe-haven assets, further pressuring emerging market currencies. This has weighed on currencies such as the Philippine Peso, Indian Rupee, South African Rand, Thai Baht, Korean Won and Indonesian Rupiah, as these economies remain heavily dependent on West Asia for energy imports.

As per the report, the Reserve Bank of India (RBI) has been actively intervening in the foreign exchange market to contain excessive volatility. It has actively intervened in both spot and forward markets, which is reflected in a decline of around $33 billion in India’s foreign exchange reserves since the onset of the conflict (as of May 1). Despite this, reserves remain at comfortable levels at about $690 billion. However, after adjusting for gold holdings and Special Drawing Rights (SDRs), reserves stand closer to $560 billion, and further adjustment for the RBI’s forward position brings them down to around $460 billion.

The agency warned that India’s current account deficit (CAD) is likely to widen in the coming quarters due to a combination of higher crude oil import costs, export disruptions linked to West Asia, and potential moderation in remittance inflows. India is dependent on imports to meet about 88% of its total oil requirement and 51% of its gas requirement.

Currency outlook

CareEdge Ratings expects the USD/INR exchange rate to average between 92 and 93 in FY27, assuming crude oil prices average around $90 per barrel. However, the agency warned that if crude oil prices remain above $100-$120 per barrel due to a prolonged geopolitical conflict, the rupee could face significantly higher depreciation pressure, with the exchange rate potentially testing levels between 94 and 98.

“In the worst-case scenario where the conflict intensifies and oil prices rise further, we could see further sharp weakening of the rupee from the current levels,” the report noted.

“If additional pressure on the rupee emerges, the RBI could consider a range of measures, including reopening a currency swap window for OMCs, offering incentives for FCNR(B) deposits, and further liberalising capital inflows,” it added.

Anindya Banerjee, Head of Commodity and Currency Research at Kotak Securities, said the twin pressures of higher oil import costs and equity outflows continue to drive dollar demand. He noted that while RBI intervention is expected at elevated levels, USD/INR could test 96 and even 96.50 if crude prices remain elevated.

Dilip Parmar of HDFC Securities highlighted that geopolitical tensions and safe-haven demand for the dollar have intensified the rupee’s decline, with near-term support seen around 94.70–95.00.

Meanwhile, Jateen Trivedi of LKP Securities expects the rupee to trade in a volatile range of 95.25–96.00, noting that weak equities and sustained FII selling are adding further pressure.