The Indian rupee has had its worst year since the 2013 ‘taper tantrum’, prompting the Reserve Bank of India (RBI) to put curbs on large dollar-bet positions by banks. The move yielded quick results: the rupee opened 128 basis points higher at 93.57 per US dollar on Monday compared to an all-time low of 94.85 on Friday.
This technical adjustment, while suggesting the RBI’s discomfort with the rupee’s 94-95 level, is unlikely to change the course for the rupee, especially if the war prolongs and the oil prices remain elevated.
So far the rupee has declined 9.5% in FY26—recording the worst performance since FY14. Much of this decline came during the pre-war period. Several reasons led to the rupee’s weak performance: a change in the RBI’s strategy from aggressive defence toward a calibrated depreciation approach, massive capital outflow due to concerns over high tariffs and valuations, and widening trade deficit and high gold imports.
The impact of the war-led disruptions—built on top of the calibrated depreciation—pushed the rupee towards a level not previously anticipated. Even then, economists believe that the RBI should not defend the rupee too much as it may provide temporary relief, but could stoke sharper depreciation later.
"If this is a long-drawn-out crisis, you want to preserve your forex reserves because when we got into trouble in 2013, our reserves went down, then the taper tantrum made it worse," said Gaura Sengupta, chief economist at IDFCFirst Bank.
Forex reserves declined 3.4% and 0.6% in FY12 and FY13, but failed to arrest the rupee’s decline. In total, the rupee declined nearly 30% between FY12 and FY14 as the taper tantrum also hit India.
"RBI letting the rupee go a bit now is a good thing; it is needed as a strategy to survive a slightly elongated crisis,” Sengupta added.
Depleting war chest
During the pre-war period in FY26, the rupee was allowed to depreciate and find its own level, with little intervention from the RBI. This, however, changed as the Iran war exposed India to one of its worst energy crises. In the first three weeks of March, reserves have declined by about 4.2%, a sharp reversal from gains of 0.7% in February and 3.9% in January. This marks the steepest drawdown since September 2022, when reserves fell during the Russia-Ukraine war shock.
As a result, the rupee's performance during the one-month war period isn’t the worst among its emerging market peers. Mint's analysis of currency movement since February 27 shows that while the rupee has depreciated sharply, several peers have been hit much harder. Currencies such as the Thai baht, Philippine peso, and Mexican peso have seen sharper declines. This is in contrast to the pre-war period, when the rupee was the worst performer.
To be sure, the depreciation in March is still steep – over 4% before the impact of RBI’s curbs reduced it to 2.7% – but not unexpected in the context of the war. The pre-war trend reflects a more structural adjustment. Overall, the depreciation in FY26 can be seen both as a correction in past overvaluation as well as the impact of the war. Radhika Piplani, chief economist at Motilal Oswal, noted that the currency was held in a “very tight 80-84 range” for nearly four years, effectively delaying a necessary adjustment.
Taper tantrum redux?
The sharp depreciation in the rupee in FY26 has brought back memories of the taper tantrum era of 2013, when the rupee had declined sharply. A 'taper tantrum' is a sudden market panic that occurs when a central bank—most notably the US Federal Reserve—signals it will reduce its massive bond-buying programs, causing investors to rapidly pull capital out of emerging markets such as India.
Back in 2013, the economy was still recovering from the impact of the 2008-09 global financial crisis, the rupee was already weakening sharply, crude oil prices were consistently above $100 per barrel, India’s forex reserves were only around $300 billion, and the current account deficit was 5% of GDP. India had become a part of the “fragile five” emerging markets.
However, the fundamentals are quite different now. Years of low oil prices have helped the current account balance and helped the RBI build a huge war chest. The current account deficit stood at just 1% of GDP until December, and the forex reserves remain strong at around $700 billion.
Yet, the RBI’s direction to banks to cap their net open rupee positions in the foreign exchange market at $100 million by the end of each business day, with compliance required by April 10, reveals nervousness over the rupee levels despite the huge war chest.
According to Bloomberg, the forced unwinding of the rupee bets could trigger huge losses for the banks. While uncertain times can justify forceful methods (the RBI had taken similar steps in 2011), the impact is likely to be limited. Once the unwinding is complete, the rupee’s trajectory will again be dictated by the structural issues like high global oil prices, foreign outflows, and trade deficit, experts said.