India’s central bank is burning through foreign exchange reserves at an unprecedented pace to defend the rupee and contain government borrowing costs, as fallout from the US-Israeli war against Iran threatens the world’s fastest-growing major economy.
Since conflict began nearly three weeks ago, the Reserve Bank of India has depleted more than $20 billion in foreign exchange reserves, attempting to support a currency that has declined 2.3% against the dollar over that period and hit another record low Thursday, according to Mumbai bankers. The central bank’s net-short book—which measures its forward selling of greenbacks—has expanded to more than $100 billion, bankers said.
Record Bond Purchases Support Borrowing Costs
The RBI has simultaneously undertaken record government bond purchases over the past year, including 1 trillion rupees ($10.7 billion) worth of debt this month, aimed at increasing bank liquidity and supporting the fixed income market. India’s 10-year bond yield has climbed almost 0.2 percentage points year-to-date despite the intervention.
The country imports approximately 90% of its crude oil and roughly half of its natural gas, both of which have surged in price since fighting began. India is already grappling with widespread cooking gas shortages as supply disruptions compound. The Gulf region serves as India’s largest trading partner and source of more than $50 billion in annual remittances from millions of Indian workers, which provide a crucial buffer for the nation’s external accounts.
The rupee ‘is among the more exposed EM [emerging market] currencies to the Iran war, not least because about half of India’s energy imports come from the Gulf states’, said Priyanka Kishore, founder of research consultancy Asia Decoded. “Also at risk is the sizeable flow of remittances from the Middle East, which plays an important role in containing the current account deficit in the face of a widening trade gap.”
Foreign Exchange Reserves Decline to $563 Billion
The rupee ranks among Asia’s worst-performing currencies this year, reflecting rising concern over India’s swelling energy import bill, inflation risks, capital outflows and current account stability. The RBI’s intervention has been substantial—during the conflict’s first week alone, the central bank burnt through almost $10 billion of foreign exchange reserves, reducing them to $563 billion according to official data. The Reserve Bank of India did not respond to requests for comment.
Energy Dependence Turns Growth Story Into Vulnerability
India’s $20 billion reserve burn in three weeks exposes how quickly energy import dependence can transform a growth narrative into a balance of payments crisis. The RBI is fighting on two fronts simultaneously—selling dollars to defend the rupee while buying bonds to suppress yields—a combination that works only as long as reserves last and market pressure doesn’t intensify. With $563 billion remaining and intervention running at the current pace, India has perhaps six to nine months of capacity to maintain this strategy before facing uncomfortable choices between currency defence and inflation control.
The broader lesson applies to any rapidly growing economy built on energy imports: impressive GDP growth rates become hostage to geopolitical events thousands of miles away, and the massive reserve accumulation that seemed prudent during good times proves insufficient when oil shocks and currency pressure hit simultaneously, validating concerns about whether emerging market growth models dependent on stable energy flows can survive extended periods of Middle East instability.
