The Indian rupee recently fell to a historic low, highlighting how soaring oil prices are increasingly offsetting India's policy efforts to stabilize its external account. A deteriorating trade balance, continuous foreign capital outflows, and expanding balance of payments pressure have collectively locked the rupee into a sustained depreciation trend, also revealing a deepening external vulnerability.

The Reserve Bank of India had previously introduced multiple measures aimed at curbing speculative positions in the foreign exchange market, which initially led to a strengthening of the rupee. However, those earlier gains have now been entirely erased. In recent months, the RBI has intensified its selling of US dollars, tightened domestic market liquidity, and strengthened oversight of offshore markets: on March 27, it tightened banks' net open position limits, and on April 1, it prohibited trading in rupee-related non-deliverable forward contracts.

These measures initially triggered short-covering and compressed forward premiums. By narrowing the arbitrage opportunities between onshore and offshore markets, they temporarily stabilized the rupee's exchange rate.

However, such interventions can only smooth exchange rate fluctuations and cannot reverse the overall depreciation trend. Although India's overall foreign exchange reserves appear ample, the reserve level has declined since the end of March, reflecting the rising costs of the central bank's heavy intervention in the spot market.

The RBI's use of US dollars to defend the currency has caused its net forward short position in foreign exchange to surge to a record $103 billion, indicating that the room for reserve adjustment has reached a rigid upper limit.

This massive forward short exposure leaves the RBI highly vulnerable to liquidity squeezes during contract rollovers. As market participants price in the rising costs associated with the settlement and rollover of these contracts, the spread between onshore and offshore forward premiums continues to widen against a backdrop of shrinking spot market liquidity.

Affected by high oil prices and a drying up of foreign capital inflows, India's current account deficit for this fiscal year is expected to widen further.

Financing pressures continue to intensify: Since 2026, overseas investors have sold over $20 billion worth of Indian equities, while foreign direct investment and external commercial borrowing have declined significantly.

This structural funding gap directly weighs on the currency's weakness. Insufficient capital inflows force the rupee to bear the full impact of the widening trade deficit alone, keeping the domestic currency under persistent depreciation pressure.