Indian policy discourse has often approached sharp rupee depreciation through the lens of a dominant proximate cause. The taper tantrum in 2013, crude oil and current account pressures in 2018, the Fed’s rate cycle in 2022, and the Iran conflict in 2026 have each, in turn, served as convenient explanatory anchors. Each of these explanations contains a portion of the truth. None contains the whole of it.

This article is an attempt to do precisely that, to treat the rupee not as a victim of external misfortune, but as a diagnostic instrument that reliably reveals the cumulative consequences of choices made and choices deferred.

The rupee's depreciation of 9.88 percent in FY2026, the steepest fiscal-year decline in fourteen years and its subsequent slide to historic lows beyond INR 96 per US dollar in May 2026, demand a comprehensive reading.

Part I: The anatomy of the crisis - What the numbers actually say
The trajectory: From managed decline to accelerated fall

One must trace the trajectory with precision to understand the scale of the current stress. The rupee spent most of calendar year 2024 in the 83-84 per dollar range, a zone that appeared stable, partly because the RBI's active interventions manufactured that stability. However, as shown in Figure 1, by early 2025, it had crossed 85. By the close of FY2026 on March 31, 2026, it had depreciated from 85.53 to 92.76, a fiscal-year loss of 9.88 percent. And by mid-May 2026, it had breached 96, touching an intraday record of 96.14 on certain sessions, before settling around 95.86. In aggregate, the rupee has depreciated roughly 6 percent from the beginning of the year 2026, a pace that makes it the worst-performing Asian currency of the year. The previous fiscal year, FY2025, had itself recorded a 4.74 percent annual depreciation.

The reserve drawdown: The hidden cost of defence

The RBI's response to the rupee's slide has been vigorous and expensive. By conservative estimates, the central bank sold over $100 billion across spot and forward markets during FY2026 to manage the rate of depreciation. The cost of this defence is starkly visible in reserve data. India's forex reserves, which had touched a historic peak of $728.49 billion in February 2026, had eroded to approximately $690.69 billion by May 1, 2026, a drawdown of over $30 billion in barely three months.

Additionally, forward-market derivative obligations stemming from earlier currency support operations are estimated at approximately $103 billion, a contingent liability of considerable proportions. At approximately $709 billion as of mid-March 2026 (per RBI data), the reserves remain adequate, covering over ten to twelve months of imports, well above the traditionally accepted minimum of three months. The speed of the drawdown is itself revealing: currency defence may be necessary, but it comes at a cost and can only buy time, not resolve the underlying pressures.

The external account: A deficit that keeps widening

India's current account deficit widened to $13.2 billion, or 1.3 percent of GDP, in the December quarter of FY2026, up from $11.3 billion a year earlier. Analyst projections now place the full-year FY2026 CAD between 1.7 percent and 2.0 percent of GDP, with Goldman Sachs forecasting the annual deficit at $37 billion. India's merchandise trade deficit for FY2026 widened by approximately 26 percent year-on-year to $119.3 billion. The April 2026 trade deficit alone stood at an alarming $28.4 billion. These are not temporary aberrations. They reflect a structurally import-intensive economy that has not yet built the export engine robust enough to offset its outward dollar demand.

Part II: The proximate triggers
Trigger one: The Iran War and the oil shock

The geopolitical ignition for the current crisis was the conflict involving the United States and Iran that escalated in late February 2026. The consequences for India were immediate and severe. Brent crude prices surged over 44 percent from pre-conflict levels, breaching $105 per barrel and at times approaching $110. Fears over the Strait of Hormuz, through which approximately 20 percent of the world's crude oil transits, created both a real supply disruption and an anticipatory risk premium that proved remarkably durable.

For India, a country that imports approximately 85 percent of its crude oil requirements, this was not merely an energy problem. It was a balance-of-payments problem, an inflation problem, and a currency problem simultaneously. Every sustained $10 rise in crude prices adds roughly $15 billion annually to India's import bill, which must be settled in US dollars. The oil shock therefore created a structural surge in dollar demand from oil companies and importers that, by its very nature, pushed the rupee downward.

The Strait of Hormuz dimension deserves particular attention from a strategic banking perspective. India's exposure to this chokepoint is not abstract. Three of India's top five crude suppliers route significant volumes through or around this waterway. The geopolitical fragility of this routing has been known for years; what was perhaps underestimated was the speed with which a disruption could translate into currency market volatility of this magnitude.

Trigger two: The foreign portfolio investor exodus