Mumbai: The Indian rupee’s slide to fresh record lows amid the ongoing West Asia war is prompting calls for deeper structural reforms instead of short-term liquidity measures to stabilize the currency, five market participants told Mint.
While the US-Iran conflict has intensified pressure on the rupee, experts said the currency’s weakness predates the war and reflects broader concerns over slowing capital inflows at a time when India’s current account deficit is expected to widen.
Since the war began on 28 February, the rupee has declined by 4.6%, according to Bloomberg data. After clocking fresh lows for three consecutive trading sessions, the currency hit a fresh record low of 95.96 per US dollar on Thursday, before trimming losses and ended at 95.64 compared with 95.66 on Wednesday. The rupee also emerged as one of the world’s weakest-performing currencies last fiscal year (FY26), declining about 11%.
The rupee’s fall has been exacerbated by outflows of foreign capital. According to data from NSDL, foreign portfolio investors (FPIs) pulled out nearly ₹1.8 trillion from Indian equities in FY26, the highest outflow in 34 years. So far in FY27 (till 14 May), they have sold equities worth ₹89,007 crore, compared with just ₹250 crore in the year-ago period.
There were other reasons, too. “One of the reasons why the rupee was weak even before the US-Iran war was because we kept our rates too low,” said Anant Narayan, former whole-time member of India’s market regulator, the Securities and Exchange Board of India (Sebi). In 2025, the Reserve Bank of India (RBI) cut the repo rate by 125 basis points to 5.25%, with the last 25-bps reduction delivered in December.
The debate over whether rates should rise again has intensified as elevated crude oil prices threaten inflation and put pressure on the rupee ahead of the RBI’s monetary policy meeting in early June, where markets will closely watch for signals on liquidity, interest rates and the central bank’s currency management strategy.
On Thursday, a Mint poll of 10 economists, banks and brokerages showed the rupee is expected to end the year at 96-98 per dollar, with most forecasting a 3-4% depreciation in FY27 if crude prices remain elevated. Near-term forecasts from five economists placed the currency in the 94.5-96.5 range over the next two weeks to one month.
“Large RBI bond purchases and low interest rates may appear to assist credit growth. However, debt markets are stunted when post-tax interest income returns fail to beat inflation expectations,” Narayan said.
Narayan said allowing markets to determine interest rates more freely would help restore currency stability by improving the interest rate differential between the rupee and the dollar. That, he said, could attract more money into debt markets and ease concerns around elevated equity valuations.
Ajay Marwaha, senior executive and fixed income head for local and offshore at Nuvama Group, echoed the view, saying India should allow markets to determine bond yields more freely instead of relying heavily on intervention.
“They need to let markets find a level; they need to create structural changes,” Marwaha said. “Permit free pricing of government bonds. Bonds will find the correct level. The rupee will stabilize and flows will come back.”
Narayan also cautioned against relying on schemes such as foreign currency non-resident (FCNR) deposits to attract dollars, recalling the RBI’s use of such measures during the 2013 taper tantrum. “The FCNR scheme is tempting, but it is also expensive,” he said, adding that India instead needs durable long-term capital inflows.
Marwaha said India should allow banks to short government securities held under the held-to-maturity category, reduce RBI intervention in bond markets, and permit more market-driven pricing of credit. He also suggested raising part of India’s borrowing overseas through rupee-denominated masala bonds and creating euro-clearable rupee bonds to attract global investors.
Another solution could involve boosting domestic fixed asset creation or reducing excess savings through fiscal expansion, according to Tanay Dalal, senior vice president-II and business & economic research at Axis Bank.
“These measures will widen the current account deficit, but there is a point at which improved asset valuations can once again crowd in foreign savings,” Dalal said. “To this extent, disinvestment, including through the National Monetisation Pipeline, can help limit the drift towards weakening in fair value, although some further weakness will still need to be countenanced.”
On Monday, Mint reported that India’s current account deficit could widen sharply to 1.8-2.4% of GDP in FY27 from around 0.9% in FY26 because of rising crude oil prices and weaker merchandise trade dynamics.
This has also revived questions over how the rupee should be valued. A 12 May report by Axis Bank said traditional measures may no longer capture the new global reality.
Traditionally, economists use the Real Effective Exchange Rate (REER) to assess whether a currency is overvalued or undervalued against trading partners after adjusting for inflation. By that measure, the rupee is already at its weakest level since 2014.
However, Dalal said that another framework, the Fundamental Equilibrium Exchange Rate (FEER), is now more relevant because global capital flows have structurally changed.
“Yes, the INR is at 2014 levels when viewed on an REER basis. However, it remains considerably overvalued,” Dalal said.
According to him, the post-2008 era of excess global savings is fading as China’s savings surplus slows, global defence spending rises and liquidity tightens worldwide. Countries such as India, Vietnam and Turkey could therefore face sustained capital outflows.
“A fair value today is likely to be commensurate with spot INR somewhat above 100,” Dalal said, adding that the rupee may need to weaken further to restore balance-of-payments equilibrium.
However, the FEER view remains contrary to the more widely followed REER-based approach used by policymakers and markets.
The RBI has taken several steps to support the rupee, including buy-sell forex swaps and tighter net open position norms for banks to curb speculative offshore activity. Since the NOP tightening on 27 March, the rupee had appreciated nearly 2% before the latest bout of weakness.
Still, economists have warned against excessive market intervention. According to Dalal, global studies showed that forex intervention works best to smooth volatility or buy time for adjustments, but cannot offset structural shifts in capital flows indefinitely.