Why Rupee Falls During Wars: Impact Of Oil Prices, Dollar Strength And FII Outflows
2025 saw Indian currency Rupee fall nearly 5% in the entire year. But in 2026, Rupee has already fallen more than 4% in the first three months itself.
And the ongoing Iran-Israel war has been a big reason behind Rupee’s depreciation.
But why is this happening? Why is the Rupee falling during this war? And has this happened before too? Let us find out.
Rupee’s Performance During Wars
In the first three weeks of the ongoing Iran-Israel war, Rupee has already fallen more than 3%, going from the 90.9 mark on February 27th (a day before the war began), to 93.8 mark on 23rd March 20261.
Even in some of the previous geopolitical tensions, Rupee has suffered losses.
For example, Syria’s civil war of 2013 saw Rupee depreciate by 13% in just one month of August.2 While Syria in itself was not a big producer of oil, it was the market fear of the US possibly attacking Syria which drove up oil prices around 15%-20% at that time3.
Even in the case of the Russia-Ukraine war of 2022, the Rupee fell around 10% that year4.
So, history is witness that it is not unusual for Rupee to fall amid rising oil prices and geopolitical wars.
Why Rupee Falls During Geopolitical Tensions
There are two key reasons as to why Indian currency depreciates amid geopolitical tensions:
1. Rising oil prices
Given that India imports more than 85% of its crude oil and pays in dollars, a surge in oil prices increases our import bill5. This directly raises the demand for US Dollars from importers, hence putting pressure on the Rupee, leading to its downfall amid such wars and geopolitical tensions.
2. Foreign investor’s exodus
As war increases geopolitical risk, global investors take that into consideration and go into the ‘sell-off’ mode by rushing towards the safe US Dollar. That is why foreign investors have already pulled out Rs 88,000 crore in the form of dollars in the first three weeks of March. That is why there is pressure on the Rupee.
3. Strengthening of the US Dollar
Since the US Dollar is considered the world’s primary reserve currency backed by relatively stable institutions and markets, global uncertainties like wars drive up the demand for the American currency, which in turn weakens emerging market currencies such as Rupee.
How Has The Rupee Performed In Recent Years?
Whether there is geopolitical tension or not, the Rupee has kept on depreciating in 9 out of the last 10 years.
Year | Change in Rupee vs US Dollar |
2025 | -4.90% |
2024 | -2.60% |
2023 | -0.40% |
2022 | -11.00% |
2021 | -1.70% |
2020 | -2.50% |
2019 | -2.70% |
2018 | -9.20% |
2017 | 6.30% |
2016 | -2.50% |
2015 | -4.50% |
Source: Investing6
RBI’s Role In Supporting Rupee
Earlier this month, RBI had stepped up to support Rupee by intervening in offshore and domestic markets. The central bank had said that it will buy Rs 1 trillion ($10.9 billion) of bonds from the open market this month (March)7.
The 2026 Record Low: War, Oil And The Rupee's Worst Fall In A Decade
The theory became reality in 2026. As Middle East tensions escalated and oil prices spiked, the Indian rupee fell to an all-time low of INR95.23 against the US dollar on May 3, 2026 - the steepest single-day fall in recent memory, with the rupee dropping 39 paise in one session alone.
This was not an isolated event. The slide had been building through 2025 and accelerated in early 2026. Record FPI outflows, a widening current account deficit driven by high crude import costs, and the uncertainty from US trade tariffs all converged at once.
The RBI intervened repeatedly but stopped short of defending specific levels, allowing the rupee to find its floor which kept moving lower.
The war-oil-rupee connection played out textbook fashion. Higher crude prices leads to larger import bills in dollars which leads to more dollar demand which further puts rupee under pressure. Add to that the flight of foreign capital to safer assets during geopolitical uncertainty, and the rupee had little support.
For Indian consumers and businesses, the all-time low translated into higher fuel costs, more expensive imports, and inflationary pressure. It is a reminder that when wars are fought far from India's borders, the rupee still ends up paying part of the price.
Rupee Expected To Hit 100 Per Us Dollar Mark In 2026?
With Rupee already dropping to 93.8 per US Dollar mark on 23rd March, 2026, concerns about the Indian currency touching the 100 mark are rising among investors, though some industry experts do not think Rupee will depreciate that much8.
But the falling Rupee has raised concerns for global investment banks, with US-based Goldman Sachs slashing the Indian economy’s growth forecast from 7% (pre Iran-Israel war) to 5.9% for this year9.
Nonetheless, we will have to wait and watch to see whether the Rupee goes on to recover or depreciates further this year.
Conclusion
The recent fall in the Indian Rupee during the Iran-Israel conflict highlights a familiar pattern, geopolitical tensions often trigger currency pressure through rising oil prices, FII outflows, and a strengthening US Dollar. While short-term volatility may seem alarming, history shows that such phases are not unusual for emerging market currencies like INR.
For investors, the key lies in understanding these macroeconomic triggers rather than reacting to temporary movements. A weakening Rupee can impact inflation, imports, and overall market sentiment, but it also opens up opportunities in export-driven sectors and diversified portfolios.
As global uncertainties continue to evolve in 2026, keeping an eye on oil trends, RBI interventions, and foreign capital flows will be critical in tracking the Rupee’s direction.
FAQs
1. Why does the Rupee fall during wars?
The Rupee typically falls during wars due to rising oil prices, increased demand for US Dollars, and foreign investor outflows seeking safer assets.
2. How do oil prices affect the Indian Rupee?
India imports over 85% of its crude oil. Higher oil prices increase the import bill, raising dollar demand and weakening the Rupee.
3. Can the Rupee hit 100 per US Dollar in 2026?
While concerns exist due to recent depreciation, experts are divided. RBI intervention and global factors will play a key role in determining this.
4. What is RBI doing to support the Rupee?
The RBI intervenes by selling dollars, managing liquidity, and buying bonds to stabilise the currency during periods of volatility.
References:
1. RBI, accessed from: https://www.rbi.org.in/scripts/referenceratearchive.aspx
2. The Economic Times, accessed from: https://economictimes.indiatimes.com/markets/forex/rupee-hits-fresh-record-low-of-68-75/-slips-nearly-25-so-far-in-the-year-2013/articleshow/22116091.cms?utm_source=chatgpt.com
3. NPR, accessed from: https://www.npr.org/2013/08/29/216924340/threat-of-u-s-strike-in-syria-drives-up-oil-prices
4. The Indian Express, accessed from: https://indianexpress.com/article/explained/explained-economics/why-rupee-fell-against-the-us-dollar-in-2022-explained-8355720/
5. The Wire, accessed from: https://thewire.in/energy/what-are-indias-limited-options-in-this-war
6. Investing, accessed from: https://in.investing.com/currencies/usd-inr-historical-data
7. Bloomberg, accessed from: https://www.bloomberg.com/news/articles/2026-03-10/india-s-rbi-steps-up-support-for-rupee-bonds-as-oil-tops-100
8. Business Standard, accessed from: https://www.business-standard.com/markets/news/rupee-outlook-2026-iran-war-oil-fpi-outflows-inr-usd-100-level-126032400018_1.html
9. The Hindu, accessed from: https://www.thehindubusinessline.com/economy/goldman-sachs-slashes-india-growth-forecast-warns-currency-strain-will-force-rate-hike/article70778456.ece
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