24

Apr

Gulf War poses serious threat to Indian Economy

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 Shivaji Sarkar

New Delhi I Friday I 24-04-2026

The Iran war is hurting India more than it could ever imagine. It’s hitting gas supplies, NRI remittances, FDI and causing immense losses to RBI. India also has to reposition itself in diplomacy.
As of April 2026, the Reserve Bank of India (RBI) burnt approximately $40 billion in foreign exchange reserves to defend the rupee from dropping further in massive intervention measures.
This aggressive action is in response to the rupee touching a record low of over RS 95 to the US dollar on March 30, driven by heavy oil import bills (with crude over $100 a barrel), foreign capital outflows, and massive arbitrage speculation. 
The RBI spent nearly $40 billion in both spot and forward markets since February to manage the volatility. The RBI imposed strict limits, forcing banks to unwind roughly $30-$40 billion in arbitrage positions where they were betting against the rupee.
It imposed offshore market restrictions, barring banks from offering non-deliverable forward (NDF) contracts to clients to curb speculative trading. The oil companies were directed to use specialized credit lines (e.g., from SBI) rather than the open market for dollar purchases to prevent further depreciation. 
Following these measures, the rupee recovered to around Rs 93.20 to the dollar by April 16. 
The forced, rapid unwinding of positions has led to potential losses of Rs 3,000-4,000 crore for the banking sector. Despite the intervention, analysts warn that high oil prices and geopolitical tensions may keep the rupee under pressure, with the RBI likely to maintain tight control. 
While some reports estimate a $40 billion decrease, others, such like Kotak Mahindra Bank, have estimated that the RBI has spent as much as $45 billion to protect the rupee. 
The rupee’s weakness is not a short-term fluctuation but reflects deeper structural imbalances in India’s external sector. A key factor is the country’s heavy dependence on imported energy—particularly crude oil and gas—which makes the currency highly vulnerable to global shocks. The ongoing West Asia conflict has sharply worsened this vulnerability by disrupting supply routes such as the Strait of Hormuz, driving up energy prices and inflating India’s import bill. This has widened the current account deficit, increasing demand for dollars while weakening demand for the rupee.
FDI Modest
At the same time, capital flows have turned adverse. Heightened geopolitical uncertainty has triggered risk aversion among foreign investors, leading to sustained outflows from Indian equity and debt markets. Even prior to the conflict, India was struggling to attract sufficient foreign capital, with foreign direct investment stagnating and portfolio flows weakening. This has made it increasingly difficult to finance even a modest current account deficit, pointing to a deeper erosion in the attractiveness of Indian assets.
Against this backdrop, the RBI has stepped up intervention in currency markets, selling large amounts of dollars in both spot and forward segments to curb depreciation. More recently, it has introduced unconventional measures, including restrictions on banks’ foreign exchange positions and curbs on offshore market linkages. While these actions are officially framed as efforts to manage volatility, their scale and nature suggest an attempt to influence the exchange rate level itself.
Such intervention carries significant risks. By distorting price discovery, it weakens the role of the exchange rate as a market signal. Policy unpredictability—especially sudden regulatory shifts—can undermine investor confidence, raise hedging costs, and discourage both foreign and domestic participation in financial markets. Restrictions on market activity may also reduce liquidity, amplifying volatility rather than containing it.
The fundamental issue is that the rupee’s depreciation reflects underlying economic pressures that cannot be sustainably offset through intervention alone. A weaker currency, while uncomfortable, plays an essential adjustment role: it discourages imports, supports exports, and can make domestic assets more attractive to investors. Attempting to resist this adjustment risks delaying necessary corrections and creating further distortions.
Ultimately, India faces a delicate balance between currency management and market determination. Over-intervention may stabilise the rupee temporarily, but at the cost of credibility and efficiency. A more durable approach would involve addressing structural weaknesses, restoring investor confidence, and allowing the exchange rate to function as a genuine market-driven price within an increasingly open financial system.
Remittances Crucial
The remittances sent back home by Indians working abroad have registered a 14 per cent rise in the financial year 2024-25 to a record $135.46 billion dollars, from 18.8 million Indian workers abroad, according to data compiled by the RBI. They sent home a record 129.4 billion dollars in 2024. The RBI said the inflows, classified under “private transfers”, accounted for more than 10 per cent.
India tops the list of recipient countries for remittances in 2024 and is way ahead of second-placed Mexico with 68 billion dollars. China ($ 48 billion) is in the third spot, followed by the Philippines ($40 billion) and Pakistan ($33 billion dollars), according to World Bank,
The number of Indians working overseas has tripled from 6.6 million in 1990 to 18.5 million in 2024, with its share in global migrants rising from 4.3 per cent to over 6 per cent during the same period.
Indian migrants in the Gulf countries account for around half of the total Indian migrants in the world. This all likely to shrink severely as many Gulf infrastructure needs restoration amid a slowdown and a chaotic economy.
Russia, China - The Peace Shapers
The peace, when it comes, is unlikely to be shaped by traditional Western powers. It will more plausibly be brokered by Russia and China, reflecting a shifting global balance. This raises a difficult but unavoidable question for India: how should it position itself in an emerging geopolitical configuration that may increasingly be anchored by a Russia–China–Iran axis?
Ignoring these shifts carries risks. Strategic misalignment could translate into greater instability along India’s periphery, particularly in sensitive border regions. At the same time, the domestic fallout cannot be overlooked. Labour flows, especially from southern states, intersect with social and political fault lines; any spillover of external tensions into internal discord could deepen existing fractures.
India cannot afford a reactive posture. It must reassess its strategic options with clarity and speed—balancing geopolitical realities with its long-term national interests, economic resilience, and social cohesion.
This evolving challenge demands more than short-term responses. It calls for a broader rethinking of policy, institutions, and priorities.

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