Today’s India is a far cry from 1991’s, when we were so dollar-starved that a Gulf war forced a reckoning on economic policy. Our kitty of foreign exchange is large. Yet, hostilities in West Asia, this time with Iran in the crosshairs of the US and Israel, have erupted at a particularly bad time for the Indian rupee.
Data released on Monday by the Reserve Bank of India (RBI) shows a current account deficit of 1.3% of GDP in the third quarter of 2025-26. While modest, it’s slightly wider than it was in the same period a year earlier, with imports having outpaced exports.
The worry is that our trade gap has widened amid net capital outflows. On the foreign direct investment chart, we saw $3.7 billion more exit than the sum that came in during that quarter, even as portfolio investors withdrew a net $200 million or so. Should India’s oil-import bill bloat, it would further strengthen demand for dollars.
A weakened rupee could lift exports but would also steepen our path to dollar targets of the economy’s size. Barring bouts of forex-market intervention to contain volatility, RBI is committed to letting the currency float. But if the war begins to hurt, the exception may start looking like the rule.