The Indian rupee weakened to 96.96 against the U.S. dollar, breaking past its previous record low of 96.6150 reached just a day earlier. Since the outbreak of the Iran conflict in late February, the currency has lost roughly six percent of its value, highlighting mounting pressure on emerging market economies heavily dependent on energy imports.
The prolonged deadlock in U.S.-Iran peace negotiations has kept crude oil prices elevated, worsening concerns about imported inflation for countries like India, one of the world’s largest oil consumers.
Brent crude has climbed more than 50 percent since the conflict began, significantly increasing India’s import bill and placing added strain on the country’s external finances.
Economists warn that rising energy costs, combined with slowing capital inflows and rising global bond yields, could push India toward a widening balance of payments deficit during the current fiscal year.
While a weaker currency can sometimes support exports by making locally produced goods cheaper abroad, analysts caution that excessive depreciation could trigger broader financial instability and weaken investor confidence.
“We favor a view that unfettered FX depreciation perpetuates further depreciation, rather than achieving current account equilibrium through significant devaluation,” economists at Citi said in a research note.
According to Citi, continued energy market disruptions could push the dollar-rupee exchange rate toward the 98 level in the near term, although the bank expects some recovery later if geopolitical tensions ease or policymakers take stronger measures to stabilise the economy.
The rupee’s sharp decline has accelerated concerns among regulators and policymakers, especially as foreign investors continue pulling money out of Indian markets.
Since the start of the war, overseas investors have withdrawn more than $22 billion from Indian stocks and bonds, reflecting growing nervousness over inflation risks, weaker growth prospects, and higher global interest rates.
The impact has extended beyond the currency market. India’s benchmark 10-year government bond yield rose to 7.12 percent, climbing more than 45 basis points since the conflict erupted as investors priced in the possibility of tighter monetary policy.
Meanwhile, the benchmark Nifty 50 stock index has fallen nearly seven percent over the same period, underscoring the broad pressure facing financial markets.
Globally, investors are increasingly betting that central banks may need to maintain higher interest rates for longer to contain inflation fueled by rising energy costs.
Interest-rate futures now indicate stronger expectations of a possible U.S. Federal Reserve rate hike, while Indian swap markets are pricing in nearly 100 basis points of additional rate increases over the next year.
The shift in market expectations has added to pressure on emerging-market currencies, many of which are struggling against a resurgent U.S. dollar.
Analysts say the coming months will largely depend on developments in the Middle East conflict, oil price movements, and the willingness of central banks and governments to intervene to stabilise markets.
If crude prices remain elevated for an extended period, countries with large energy import needs such as India could face sustained pressure on inflation, growth, and investor confidence.