As rupee nears 100-per-US dollar mark, focus on inflation, energy bills

New Delhi: The Indian Rupee has weakened by around 7 per cent against the US dollar in calendar year 2026 so far. The rupee has been depreciating even before the outbreak of the Iran war on February 28, due to outflow of foreign money. However, the pace of depreciation quickened as the disruptions caused due to the West Asia conflict led to a spike in energy prices.  

Since the outbreak of war between US-Israel and Iran, the rupee has depreciated by around 5 per cent. From around 91 against a dollar on February 27, it slipped to near 97 on May 19. Since April 2025, the Indian currency has depreciated by around 12 per cent.  

Considering this trend, many analysts and economists have started factoring in the rupee at 100-mark against the greenback. The three-digit mark is seen as a big psychological level.

A weaker rupee has a wider implication for the economy. It will make imports costlier. Prices of imported goods, especially oil and gas, are likely to jump further, leading to inflationary pressure.

The Reserve Bank of India (RBI) has been frequently intervening in the currency market to provide support to the rupee. Inflationary threat is the big concern for the RBI.

However, Chairman of the 16th Finance Commission and former vice-chairman of NITI Aayog Arvind Panagariya feels that the rupee should be allowed to depreciate further and the RBI should not lose its sleep over the currency depreciation issue.

“Do not let the psychology of Rs 100 per dollar determine your policy response. 100 is just a number, like 99 and 101. Whether the oil shortage is short-lived or long-lived, the right response at this moment is to let the rupee depreciate,” Panagariya said in a post on X.

He added that the Indian economy is well-positioned to absorb some inflationary pressure due to the depreciation in the currency.

“This is not 2013: Inflation was in the double digits in 2013. Thanks to your prudent monetary management, that is not the case now. Therefore, the economy is well-positioned to absorb some inflationary pressure that will accompany the depreciation,” Panagariya, an eminent economist and professor at Columbia University, remarked.

He added that the rupee would recover substantially once the oil-import bill shrinks and foreign capital seeks Indian investments precisely to take advantage of the "cheap" rupee.

FPI selling

Foreign portfolio investors have pulled out Rs 2,22,343 crore from the Indian markets so far in the 2026 calendar year. This is higher than the total sell figure of Rs 1,66,283 crore for 2025. FPI selling for May up to the 23rd stood at Rs 30,374 crore.

According to VK Vijayakumar, Chief Investment Strategist, Geojit Investments Limited, the principal reasons behind this sustained FPI selling are: poor earnings growth in India; much better earnings growth and prospects for earnings growth in other markets; ⁠high bond yields, particularly in the US; and continuous rupee depreciation and fears of further depreciation. 

“These factors, at least some of them, should change in India’s favour for the FIIs to turn buyers in India. Stabilisation of the rupee and improvement in the prospects of earnings growth can bring FIIs back to the country,” he said.

“FII action indicates this. Even while selling large-caps, they have been buying in SMIDs where growth and earnings prospects are good. This means earnings is the primary factor. An important takeaway from the Q4 results is that there are indications of earnings recovery,” Vijayakumar added.

Rupee worst hit

While India is not directly involved in the West Asia conflict, its economy, especially the currency, has been the worst hit.

Between February 27 and May 15, the Indian currency depreciated by 5.5% against a dollar. During this period, the Japanese Yen depreciated by 1.6%, British Pound by 0.8%, Euro by 1.4%, and South African Rand by 4.3%. In fact, the Chinese Yuan (0.8%), Brazilian Real (2.8%), and Russian Rouble (5.1%) appreciated against the US dollar.

The Indian currency was under pressure even before the outbreak of the Iran war. Between April 2, 2025, to February 27, 2026 (the day before the joint US-Israel strikes on Iran), the rupee depreciated by 6.4%.

The cumulative depreciation in the value of the Indian rupee against a dollar between April 2, 2025, and May 15, 2026, stood at 11.9%. During this period, other major currencies, including the Euro, British Pound, Chinese Yuan, Brazilian Real, and Russian Rouble appreciated against the US dollar.

Near-term outlook

The RBI’s intervention led to recovery in the value of the rupee towards the end of last week. Movement in crude oil price is another key factor for the movement in the value of the Indian currency.

“Aggressive intervention support and easing pressure from crude prices have helped improve sentiment in the rupee over the last few sessions. The strong rebound also reflects profit-booking in dollar longs after extreme weakness in the currency,” said Jateen Trivedi, VP Research Analyst — Commodity and Currency, LKP Securities.

For now, the near-term trend has turned supportive for the rupee, with RBI intervention continuing to play a key role in controlling volatility and restoring confidence in the forex market. The rupee range is expected between 95.00 and 95.90 in the near term, Trivedi added.