Attack On Rupee Amid Escalating Tensions In West Asia: How Will It Impact Economy

The war against Iran by US and Israel is nearing a week has rattled markets worldwide. The brunt of the rising tensions has also led to a sharp decline in the Indian rupee, as global investors exited from emerging markets and crude oil prices shot up due to fears of supply disruptions.

The rupee hit a lifetime low and breached the 93 to-a-dollar mark on March 4 amid panic selling across capital markets. The rupee has since gained back some ground hovering around 91.63 against the US dollar on March 5.

However, experts said that the pressure on rupee is far from being over, with the volatility in rupee likely to continue if the conflict in West Asia continues. The fall in rupee was majorly caused by the spike in energy prices. Brent crude oil future prices have risen more than 10 per cent in less than a week, jumping to multi-year highs due to fears that oil supply could be disrupted.

Escalation in US-Israel and Iran conflict could disrupt supply via the Red Sea and Persian Gulf and in turn impact port logistics led a market-wide selling across equities, bonds and the currency market. According to a note by JM Financials, LNG shipments are likely to bear the brunt of the conflict, while crude oil imports may realign as refiners could choose to avoid Strait of Hormuz altogether, including via ports such as Khor Fakkan, Fujairah and Salalah and find alternative sourcing. The brokerage said that any such realignment could impact cargo volumes at Indian ports in March 2026 and to West Asia, though the fallout for ports such as Mundra and JNPT were expected to be limited.

Impacts on Indian economy

The rupee has been the worst performing Asian currency in 2025. While the volatility in rupee was slightly contained as US tariffs on Indian goods were lowered, the rise in geopolitical conflict and fears of long drawn wars have resurfaced expectation of a sharper decline in the Indian currency.

The fall in rupee could lead to a domino effect and impact several facets of the economy. The first and foremost impact of a falling rupee would be on a rise in imported inflation. As the value of the rupee declines, India’s import bill will see a rise, which in turn could push up household inflation as India is a import-heavy country. Rise in crude oil prices is expected to shoot up energy prices in the country, which will impact both businesses and households.

Energy intensive industries will likely see a pressure on margins due to rise in input costs. Along with this, companies who have foreign currency borrowings will also be impacted as servicing their debt will become costlier.

As the dollar becomes costlier, the currently account deficit (CAD) of the country also widens. According to data from the Reserve Bank of India (RBI), India’s CAD increased to $ 13.2 billion, at 1.3 per cent of the country’s gross domestic product (GDP), during October to December of 2025. The rise was from $ 11.3 billion, amounting to 1.1 per cent of GDP, in the previous year.

“The rupee may weaken further as the proportion of GCC in India’s remittances is highest, and a prolonged period of conflict may impact remittance inflow into India,” Devendra Pant, Chief Economist, India Ratings & Research, said.

A rise in inflation pressures and an overall falling rupee could also put the RBI is a difficult position. Since the fall in rupee on March 4, the RBI is expected to have intervened in the foreign exchange market to limit the volatility in rupee. If the RBI intervention becomes stronger to counter the fall in rupee, overall liquidity of rupee also reduces, which in turn could also make investors risk averse to Indian markets. Additionally, in order to tame rising inflation, the RBI may in turn choose to raise interest rates, or be forced to keep interest higher for longer. This, inevitably also raises borrowing costs and lead to a cool down of consumer spending. Equity markets, which typically thrive when liquidity is higher, are expected to be impacted more than debt markets.

“A sustained oil price shock would expand the current account deficit and exert pressure on the Indian rupee amid a broader global flight to safe-haven assets and potential capital outflows...To contain inflationary spillovers, the government may be required to adjust fuel taxes or absorb part of the price increase, potentially straining fiscal balances. Oil shocks rarely remain confined to energy; they tend to transmit into logistics, fertilizers, and consumer goods, reversing the recent moderation in inflation,” Amit Modani, senior fund manager, lead – fixed income at Shriram AMC, said.

“While short-term volatility may present tactical trading opportunities, a prolonged and structural disruption to the Strait of Hormuz would represent a fundamental external shock to India’s growth trajectory. In such a scenario, the risk-reward balance shifts away from aggressive duration positioning toward high-quality accrual strategies focused on delivering more stable, risk-adjusted returns amid elevated external uncertainty,” Modani added.