Feeble signs of some de-escalation are emerging from the Gulf conflict. Backchannel engagements between the United States and Iran have resumed and pressure is building to normalise movement through the Strait of Hormuz.
The markets have responded cautiously. The Indian crude oil basket, which had spiked beyond $150 per barrel at the peak of energy supply disruption, is now hovering around $105 to $110 per barrel while the rupee has settled into a tighter 92.2 to 93.5 band after briefly breaching the 95 mark at the peak of stress.
Yet the easing is only partial. The shock has already transmitted through the system. Since February 28, when the Iran war began, the Reserve Bank of India (RBI) has moved with unusual intensity to prevent a disorderly currency cycle. What stands out is the layering of measures designed to compress volatility, drain speculation and anchor expectations.
The RBI intervened heavily in the spot market, selling dollars to prevent a sharp depreciation spiral and effectively capping the rupee within a managed range. It simultaneously forced the unwinding of an estimated $30 billion to $40 billion of arbitrage positions between offshore and onshore markets through March and early April. This reduced speculative pressure but also tightened liquidity and narrowed pricing flexibility.
It then moved to contain balance-sheet risks. Banks’ open currency positions were tightened and corporates were restricted from rebooking cancelled forward contracts, closing a key tactical hedging route. These steps were backed by closer regulatory scrutiny to ensure that hedging demand reflected genuine exposure rather than opportunistic positioning.
Liquidity tightening followed. System liquidity, which was in surplus at around Rs 2.3 lakh crore to Rs 2.6 lakh crore in January, was steadily absorbed, bringing conditions close to neutral by mid-April. Short-term funding costs hardened by 35 to 60 basis points, raising the cost of capital without a formal rate hike. The forward market adjusted sharply, with one-year hedging premiums rising by 40 to 75 basis points at peak stress. The result is visible. The rupee is holding.
But this is not stability in the conventional sense. It is a managed equilibrium, sustained by continuous intervention and calibrated tightening. This approach places India in a distinct position globally.
China manages its currency through tight intervention backed by capital controls, suppressing volatility at the cost of market flexibility. Japan intervenes sparingly, allowing the yen to adjust except in extreme episodes. The United States and Europe largely leave currencies to market forces, absorbing volatility through deep and liquid financial systems.
India sits in between. It is more interventionist than advanced economies, but far less controlled than China. The objective is not to fix the currency, but to prevent disorder. The consequence is that shocks are not eliminated. They are absorbed and redistributed within the system.
That redistribution is now visible. RBI insiders describe the current stance as “wait and watch”, a position reinforced after the Monetary Policy Committee (MPC) meeting. The central bank cannot ease unless external vulnerabilities recede convincingly. The rupee must stabilise below 90 to the dollar on its own, and crude oil must shed its geopolitical risk premium.
In practical terms, the Indian crude basket needs to move towards the $80 to $90 per barrel range, with sustained easing over several weeks. Until that happens, the burden of adjustment remains internal. India’s top 100 corporates are at the centre of that adjustment. Together, they manage foreign exchange exposure of over Rs 20 lakh crore to Rs 22 lakh crore, spanning imports, exports and foreign currency borrowings. Historically, only 35-45 per cent of this exposure is hedged, leaving a large portion sensitive to currency movements.
Since March, behaviour has shifted decisively. Hedge ratios have increased by 8-12 percentage points, hedging cycles have shortened, and exposures are being covered earlier and at higher cost. On peak days, offshore participation surged to $3 billion to $4 billion, reflecting the scale at which treasury desks have been forced to reposition.
The rupee may appear to be holding at around 93 to a dollar. But beneath that holding pattern, corporate India is absorbing Rs 20,000 crore to Rs 40,000 crore of incremental costs over a six-month period, with a far larger impact on profitability.
The cost is coming through multiple channels. Hedging costs are elevated by 40 to 70 basis points over pre-crisis levels, translating into an incremental burden of Rs 7,000 crore to Rs 11,000 crore annually for the top 100 corporates. Over the next three quarters, this alone could amount to Rs 5,000 crore to Rs 8,000 crore.
But the larger pressure is coming from oil. The Indian crude oil basket remains around $105 to $110 per barrel, compared to an average of $77 to $82 per barrel in FY25. This implies a sustained 25-30 per cent increase in input cost pressure for oil-linked sectors. Even though prices have cooled from their peak, the lagged effects are still feeding into corporate cost structures.
Combined with tighter liquidity and higher funding costs, this is driving margin compression of 100 to 180 basis points across large corporates. For a cohort generating Rs 8.5 lakh crore to Rs 10.5 lakh crore in annual profits, the potential erosion over the next three quarters could range between Rs 70,000 crore and Rs 1,40,000 crore, depending on how long current conditions persist.
The stress is uneven but widespread. Import-intensive sectors such as oil and gas, aviation, chemicals, metals and capital goods are facing the sharpest pressure, with earnings downgrade risks already in the 12-22 per cent range. Export-oriented sectors are relatively better positioned but are dealing with volatile forward pricing and slower realisations.
The adjustment is now moving towards pricing. If the Indian crude basket sustains above $95 per barrel and hedging costs remain elevated, corporates will increasingly pass on costs. Early signals suggest calibrated price increases of 1.5 to 3.5 per cent across sectors with pricing power over the next two quarters. This is the transmission channel of policy.
Every step taken to manage the rupee has created a corresponding adjustment within the system. Dollar intervention has reduced volatility but increased hedging demand. Liquidity absorption has supported the currency but raised working capital costs. Forward market tightening has reduced speculation but made pricing less efficient. The system is holding. But it is holding by shifting pressure inward.
Banks are now absorbing the next layer. They are intermediating higher hedging demand, operating in tighter liquidity conditions, and managing more volatile treasury books. Credit growth remains steady at around 13-15 per cent, but funding costs are rising and treasury income is under pressure. This is not a crisis. Balance-sheets are stronger than in previous cycles, and the banking system is well capitalised. But the nature of this cycle is different. It is not driven by excess leverage but by sustained cost pressure.
And that pressure is cumulative. The RBI cannot ease because the currency remains externally vulnerable. Corporates cannot absorb indefinitely because costs are rising across multiple fronts. Between these constraints lies a system that appears stable, but is tightening beneath the surface. If crude oil cools toward $80 to $90 per barrel, capital flows normalise, and the rupee stabilises without heavy intervention, the system can reset.
Until then, the adjustment continues. In this cycle, the risk is not a sudden break. It is the gradual accumulation of pressure that comes from managing the rupee by absorbing the shock until the cost of that absorption begins to reshape pricing, margins and growth itself.
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