The Indian rupee’s brief recovery from record lows hit resistance on Tuesday as fading optimism over a US-Iran peace deal and month-end dollar demand from oil importers capped the currency’s gains, traders said. The rupee, which closed around 95.69 per dollar on Friday, was expected to open near 95.50 on Monday but has remained under pressure as geopolitical uncertainty around the Middle East war continued to weigh on emerging market sentiment. The dollar nursed losses on May 26 on rising investor optimism of a deal being struck to reopen the crucial Strait of Hormuz and end the three-month-long Iran conflict, though fresh US attacks on Iranian targets weighed on sentiment.
Despite low odds of an imminent deal, hopes of peace pushed oil below $100 a barrel, eased pressure on emerging-market currencies, and boosted risk sentiment. Iran’s top negotiator and its foreign minister were in Doha for talks with Qatar’s prime minister on a potential deal. US President Donald Trump said talks with Iran were progressing, according to Reuters, but warned of fresh attacks if no agreement was reached, leaving traders reluctant to extend bullish positions on the rupee.
Reserve Bank of India Governor Sanjay Malhotra told the Mint newspaper that the central bank will do “whatever is required” to ensure orderly movements in the foreign exchange market, and that following the rupee’s recent fall, the currency appears undervalued.
Malhotra’s comments came after two consecutive sessions of firm central bank intervention in foreign exchange markets, which traders said helped pull the rupee back from the brink. The rupee strengthened to 95.9 per dollar from a record low of 97.15 hit on May 19 after the Reserve Bank of India continued to intervene on currency markets, with the central bank selling dollars to state banks through the third week of May.
Analysts at ING said in a note: “We’ve been at this stage before, only for talks to break down. Therefore, the market will likely be more cautious about overreacting to these headlines.”
The caution reflects a broader pattern that has defined India’s foreign exchange market for weeks. Every signal of progress in US-Iran negotiations has driven oil prices lower and lifted the rupee, only for subsequent diplomatic setbacks to reverse those gains. Brent crude oil prices retreated below $100 per barrel for the first time in over two weeks on optimism that Washington and Tehran are moving closer to a deal, providing temporary relief to India as one of the world’s largest crude importers.
Month-end dollar demand from oil importers added a separate layer of pressure on the rupee Tuesday. Oil firms in India typically ramp up dollar purchases near the end of each month to cover import bills, a seasonal dynamic that historically limits any currency rally during the final trading days of the month. The pressure on the rupee this year has been magnified by outflows from Indian equity and bond investors seeking to reduce rupee positions, initially stemming from energy importers following the surge in oil prices due to the Middle East conflict.
India’s state-owned fuel retailers increased diesel and petrol prices on Monday, the fourth hike in May, to recoup losses from higher costs due to the Iran conflict. Each price increase adds to domestic inflation pressures and compounds the burden on an economy already facing headwinds from elevated crude costs.
The dollar index was hovering just shy of 99, while stocks in Asia rose over 1% and regional currencies were mostly stronger. The broader Asia-wide lift provided only partial insulation for the rupee, given India’s outsized exposure to oil import costs relative to its regional peers.
OCBC strategists said in a note: “We still expect a slow oil unwind, even if prices fall sustainably below $100 per barrel in the second half of 2026. This suggests the dollar’s terms of trade support should not fade quickly.” The strategists added: “There is no strong case to be bearish on the dollar,” citing resilient US growth and AI-driven inflation pressures that have pushed Federal Reserve rhetoric in a more hawkish direction.
Regional and Global Impact
The rupee’s struggle reflects a challenge shared across energy-importing emerging markets, but India’s exposure is acute. The rupee has weakened by more than 6 per cent against the US dollar since the West Asia conflict began, making it Asia’s worst-performing currency so far in 2026.
India raised import duties on gold and silver from 6 per cent to 15 per cent in a move aimed at protecting foreign exchange reserves, though traders said the rupee’s trajectory would be shaped less by gold flows and more by crude’s direction and the West Asia situation.
Analysts at Fitch Group’s BMI unit offered a cautious but stable medium-term outlook. The Indian rupee is likely to trade broadly sideways at around 95 per US dollar by end-2026. The US-Iran conflict has exerted downward pressure on emerging market currencies, especially for large energy importers like India, with the rupee depreciating 4 per cent during March-April 2026. BMI expects slowing profit repatriation and central bank currency intervention to limit the pace of rupee depreciation going forward.
Background
The rupee’s current weakness traces directly to the US-Iran military conflict, now in its third month, which drove Brent crude prices sharply higher and strained India’s external balances. The war between the US, Israel and Iran has weakened the Indian currency, adding to a near 5 per cent fall in 2025. The Reserve Bank of India has intervened repeatedly in currency markets this year, selling dollars through state banks to slow the rupee’s slide. A temporary US-Iran ceasefire, extended by President Trump in late April, had briefly lifted sentiment, but subsequent diplomatic breakdowns — including Trump’s rejection of Iran’s peace proposal as “totally unacceptable” — triggered fresh selloffs. The rupee crashed 139 paise to 94.90 against the US dollar in early trade on May 11 after Trump rejected Iran’s response to a US peace proposal, following which crude oil prices surged rapidly. The RBI held its benchmark interest rate steady at 5.25 per cent at its most recent meeting, according to investingLive, while downgrading growth forecasts, citing conflict-driven pressures.
What Happens Next
Iran’s foreign minister and chief negotiator remained in Doha on Tuesday for continued talks with Qatari officials, according to Reuters, with a formal US response expected within days. Markets are focused on a critical 48-hour window during which the US expects Tehran’s formal response through Pakistani mediators, traders said. The RBI is expected to maintain its presence in the spot foreign exchange market to manage excessive volatility, Governor Malhotra indicated. Month-end dollar demand from oil importers is likely to keep the rupee under pressure through the last trading day of May before easing in early June. BMI expects India’s GDP to grow 7.6 per cent and inflation to reach 3.4 per cent during the current fiscal year, though currency weakness and subsidy costs pose upside risks to that inflation forecast.
