India’s Forex Reserves at Risk: The Dual Impact of High Crude Oil Prices & Weak Rupee

Why Rising Crude Oil Prices Are a Concern for India
India imports over 85% of its crude oil, making it highly sensitive to global price fluctuations.
Brent crude prices have surged due to tensions between Iran and Israel, raising fears of supply disruptions.
If the Strait of Hormuz is affected, nearly 20% of global oil supply could be disrupted, leading to further price hikes.
Even with diplomatic efforts, Brent crude remains elevated compared to recent averages, increasing India’s import costs.
The Rupee’s Depreciation Adds to the Problem
The rupee fell from ₹85.35 to ₹86.84 per USD in just a few weeks—a 1.75% decline.
A weaker rupee means higher costs for dollar-denominated oil imports.
Every ₹1 drop in the rupee’s value could increase India’s annual oil import bill by ₹8,000–10,000 crore.
Broader Economic Consequences

1. Rising Inflation
Increased crude prices lead to higher fuel costs, pushing up transportation and logistics expenses.
While retail fuel prices remain unchanged for now, oil companies are absorbing losses, which is unsustainable long-term.

2. Impact on Businesses
Corporate profits may shrink due to elevated crude prices.
Export-import sectors could face higher freight and insurance costs, affecting trade margins.

3. RBI’s Challenge: Managing Forex & Inflation
The Reserve Bank of India (RBI) is cautiously intervening to stabilize the rupee without depleting forex reserves.
Rising bond yields indicate growing inflation fears and potential increases in government borrowing.
4. Widening Current Account Deficit (CAD)
A higher oil import bill + weaker rupee could expand India’s CAD, making external financing costlier.
If prolonged, this could limit fiscal flexibility and complicate monetary policy decisions.

What Happens Next?
If tensions ease, oil prices may stabilize, and the rupee could recover.
If conflict escalates, India may face higher inflation, increased borrowing costs, and forex instability in late 2025.


Sample Questions & Answers for Competitive Exams (SSC, PSC, Banking, etc.)
Q1: How does a rise in crude oil prices affect India’s economy?
A1: Rising crude prices increase India’s import bill, weaken the rupee, raise inflation, and widen the current account deficit.
Q2: Why is the depreciation of the rupee concerning for India?
A2: A weaker rupee makes oil imports more expensive, increasing fuel costs and inflation while straining forex reserves.
Q3: What role does the Strait of Hormuz play in global oil supply?
A3: Nearly 20% of global crude oil passes through the Strait of Hormuz; any disruption here can spike oil prices worldwide.
Q4: How does the RBI respond to rupee depreciation?
A4: The RBI intervenes in forex markets by selling dollars to stabilize the rupee while avoiding excessive forex depletion.
Q5: What could be the long-term impact of high crude prices on India’s fiscal health?
A5: Prolonged high oil prices may increase fiscal deficits, raise borrowing costs, and limit government spending on development projects.