DBS said conflict risks and India’s reliance on imported energy may keep the rupee under pressure. It estimated that each $10bbl move in oil prices can lift the current account deficit by 0.35% of GDP and add 20–30bps to inflation, depending on retail price pass-through.
It said India’s direct trade with Iran has fallen sharply over the past 5–6 years due to US sanctions. It added that six of India’s top ten petroleum and crude oil suppliers are in the Middle East and provide more than half of total supply.
Fuel Sector Reforms And Subsidy Context
The note referred to earlier fuel-sector reforms, including deregulation of petrol and diesel prices. It said total subsidies were 1.2–1.3% of GDP, with petroleum under 3% of the total.
It said authorities may limit full pass-through of higher global fuel prices to consumers, citing household purchasing power, support for businesses, and a packed state election calendar in 1H26. It also said prolonged hostilities could affect remittances and the current account, while the central bank was not expected to change policy, with an extended pause still in place.
With escalating Middle East tensions, oil prices are a major concern. Brent crude has pushed past $95 a barrel in recent trading, putting direct pressure on the Indian Rupee. Consequently, we see the USD/INR pair trading above the 84.00 mark as India imports over 85% of its crude oil needs.
This environment suggests positioning for further Rupee weakness. Every $10 increase in oil prices is expected to widen the current account deficit by about 0.35% of GDP. Traders should consider buying USD/INR call options or futures to capitalize on this expected depreciation.
Election Calendar And Pass Through Constraints
The upcoming state election calendar through the first half of 2026 complicates the picture. The government will likely avoid passing the full cost of higher fuel prices to consumers to protect household budgets. This may cushion the immediate inflationary shock but will strain the finances of oil marketing companies.
The combination of a weaker currency and higher input costs is a headwind for Indian equities. We saw during the geopolitical flare-up in late 2025 how oil price spikes can trigger market corrections. This makes protective put options on the Nifty 50 index an attractive hedging strategy for the coming weeks.
We don’t expect the Reserve Bank of India to intervene with rate hikes just yet, despite inflation already tracking above target. The latest CPI data showed inflation at 5.2%, but the central bank will likely prioritize growth amidst the external shocks. This policy pause will leave the Rupee with less support in the short term.
