India’s foreign exchange reserves witnessed their sharpest weekly fall in over a year, highlighting the growing pressure on the rupee as geopolitical tensions in West Asia ripple through global financial markets. According to data released by the Reserve Bank of India, the country’s forex stockpile declined by $11.68 billion in the week ended March 6, marking the steepest weekly drop since November 2024.

The decline comes at a time when global markets are grappling with the fallout from the ongoing Iran war, which has disrupted energy supply routes and triggered sharp moves in commodity and currency markets. Analysts believe the Reserve Bank of India stepped into the foreign exchange market during the week to stabilize the rupee as volatility surged across emerging market currencies.

Market economists say the central bank’s actions were aimed at preventing disorderly movements in the currency rather than defending a particular exchange rate level. In an environment where crude oil prices have spiked sharply and global investors are shifting toward safe-haven assets, emerging market currencies especially those of oil-importing economies have come under considerable stress.

Economists note that the drawdown in reserves appears to reflect both active intervention and valuation effects. Estimates suggest that roughly $6.1 billion of the fall could be attributed to direct dollar sales by the central bank to support the rupee in the currency market. Another $5.4 billion decline is believed to have resulted from revaluation losses caused by movements in global asset prices and currencies.

The broader macro backdrop has also played a role. The Bloomberg Dollar Spot Index rose about 1.3% during the week, marking its biggest weekly gain since mid-November 2024. A stronger dollar typically leads to valuation losses on reserves held in non-dollar assets such as euros or yen. At the same time, gold prices slipped more than 2% during the period, contributing further to the revaluation impact on India’s reserve portfolio.

The rupee has faced sustained pressure since the escalation of the Iran war due to concerns around energy supply disruptions. The conflict has affected shipping routes through the Strait of Hormuz, one of the world’s most critical oil transit corridors. Blockages and security risks in the region have triggered a sharp spike in crude oil prices.

Since the start of the conflict, crude prices have risen nearly 37%, amplifying concerns for oil-importing economies. For India, which imports a large share of its energy requirements, higher oil prices directly widen the trade deficit and increase demand for dollars from domestic refiners.

Currency markets have therefore been watching the RBI’s response closely. Analysts suggest the central bank’s primary objective is to contain excessive volatility in the rupee rather than prevent gradual depreciation driven by fundamentals.

In parallel with currency market intervention, the central bank has also taken steps to maintain liquidity conditions in the domestic financial system. Reports indicate that the RBI conducted open market operations and secondary market purchases of government bonds during the period. These measures help offset liquidity tightening that can occur when the central bank sells dollars to defend the currency.

Dollar sales absorb rupee liquidity from the banking system, which can lead to tighter financial conditions if not balanced with liquidity injections. By purchasing government bonds, the central bank can inject rupees back into the system and stabilize money market rates.

From a policy perspective, the recent actions underline the RBI’s strategy of managing financial stability during external shocks. India’s large forex reserve buffer provides the central bank with flexibility to intervene during periods of stress without immediately raising concerns about external vulnerability.

However, the episode also highlights the sensitivity of India’s macro environment to global energy markets and geopolitical developments. A prolonged surge in oil prices could worsen the current account deficit and sustain pressure on the rupee.

For financial markets, the implications are mixed. On one hand, RBI intervention reduces the risk of abrupt currency depreciation that could destabilize equity and bond markets. On the other hand, continued geopolitical uncertainty may keep global capital flows volatile.