Most Asian currencies have fallen significantly against the US dollar since the start of the US-Israeli war against Iran. Of these however the Indian rupee has been perhaps the worst performer, having fallen to as low as Rs. 93.73 by Friday March 20, from Rs. 91.01 on February 27 the day before the war started. The immediate reason for the fall is obvious: India is a large importer of oil and gas, much of it routed through the Strait of Hormuz, whose closure not only reduces the availability of these commodities to India, but also puts a strain on India’s balance of payments and hence on the value of the rupee. Added to this are other factors, such as the drying up of remittance inflows which had been a major factor sustaining our balance of payments.

It is not that our current account balance has suddenly become worse: just three weeks of war cannot cause such a dramatic worsening of our current account balance; it is the anticipation of such a worsening that has led to an exodus of finance from India and hence to the rupee’s decline. We are talking in other words of the expectations of those who move finance around globally. They are scurrying back paradoxically to the “safety” of the dollar, even though America itself is a combatant country and American belligerence is what has caused the war in the first place. Here we have indeed a remarkable phenomenon: a fall in the value of the dollar vis-à-vis oil causes a fall in the value of other currencies, especially those of the global South, vis-à-vis the dollar itself! 

This has an important implication. Any depreciation of the currency necessarily raises the rate of inflation relative to the money incomes of the working population (if these money incomes rise synchronously then the inflation triggered by the currency depreciation would never come to an end), by increasing import costs which then get “passed on”. The countries of the global South, thus face inflation from two sources in all such situations of oil price increase in terms of the dollar: one is the inflation arising from the direct rise in the oil price in terms of the dollar, even on the premise that southern exchange rates do not depreciate vis-à-vis the dollar; the other is the inflation arising from the depreciation of these exchange rates vis-à-vis the dollar which raises the import costs of all other imported inputs (whose world prices are given in dollar terms), and which further raises the import costs of oil. For instance, if there is a 10 percent rise in oil prices in terms of dollars, while this may give rise to, say, a 5 percent increase in American prices in general, it would cause a greater than 5 percent increase in the general level of prices in the periphery; there is in short an “inflation multiplier” whereby an inflation of this sort in the metropolis causes an even more pronounced inflation in the periphery.

So strong has been the speculative sentiment against the rupee that its fall has occurred despite substantial intervention by the Reserve Bank of India. The RBI has reportedly deployed as much as $20 billion since the start of the war on Iran to stabilize the rupee; but this still has not prevented the rupee’s precipitous fall. To be sure, the fall might have been even greater in the absence of such intervention; but the fact that it has occurred nevertheless points to the strength of the speculative sentiment against the rupee.

A reason for the currently observed strength of the speculative sentiment against the rupee lies in the fact that this sentiment began even before the Iran war. The rupee was already falling vis-à-vis the dollar before the war: in just over a period of two months it had fallen from 89.94 on January 1, 2026, to 91.01 on February 27, 2026, while the Iran war started on February 28. The current fall of the rupee is so pronounced because the oil price rise on account of the war, and the resulting flight to the “safety” of the dollar, was superimposed on this already existing speculative movement away from the rupee. In fact market analysts expect this fall to continue with equal rapidity, and the rupee to fall below 95 against the dollar in the near future; and this notwithstanding the fact that the Reserve Bank of India currently holds around $700 billion of foreign exchange reserves.

This brings us to an extremely intriguing point, namely, the apparent inability of the large size of foreign exchange reserves to stem a decline in the value of the currency when speculators turn against it. If speculators expect  a fall in the value of the currency and start moving funds out of the country, or even if they do so for some other reason, then any running down of reserves to stem the outflow, only strengthens the expectation of a further decline in the currency’s value; knowing this, the central bank is also more circumspect in using its foreign exchange reserves for maintaining the value of the currency when the speculators’ “mood” is against the currency. Hence, even if a country has large reserves, its currency’s value may still go on declining. Foreign exchange reserves may be useful for meeting debt servicing obligations, or for actually paying for a current account deficit on the balance of payments, that is, for meeting the liquidity needs of the economy; but they are not of much use in stemming a decline in the value of the currency, when the “mood” of the market is such as to cause a decline.

When it is kept additionally in mind that foreign exchange reserves, if built up from the inflow of finance by foreign investors rather than from the country’s own current account surplus, typically entail a lower interest rate being earned by the country on these reserves, compared to the rate being paid by the country to those who brought in this finance, then the case for having large borrowing-based foreign exchange reserves, becomes even more questionable. In India for instance the average rate earned on the foreign exchange reserves held by the RBI would scarcely exceed 1.5 percent, while the average rate (including capital appreciation) paid to those who brought in the finance would be at the very least 7-8 percent. Every unit of foreign exchange reserve acquired through financial inflow amounts therefore to a case of “borrowing dear to lend cheap”; and the larger the reserves, the greater is the “drain” on the country.

Borrowing-financed large reserves thus entail their own problems; the point here however is to underscore the drawbacks of a regime involving a “liberalized” trade and capital account, where tariffs and quantitative trade restrictions are eschewed, where finance is allowed to flow freely into and out of the country, and where the exchange rate, and hence the living conditions of millions of working people, is subjected to the whims and caprices of a bunch of international speculators. These are the features of a neo-liberal economy and we are seeing at present in India its deleterious effects in the form of a decline in the value of the rupee.

The present situation however also provides a great opportunity to move away from the neo-liberal regime. Donald Trump’s tariff aggression opens the way for other countries, including India, to impose their own set of tariffs to manage their current account balances. Likewise the very large number of countries against which the U.S. is currently imposing sanctions makes it possible for these countries to come together, and with others like India, to form their own bilateral or multilateral trading arrangements. The hallmark of such arrangements should be the avoidance of US dollars as the means of settling transactions and also as the means of settling balance of payments deficits; instead the transactions should be reckoned in each other’s currencies (among which there should be fixed exchange rates) and the balances should be carried over from one year to the next, until settled by buying each other’s goods through mutual agreements. This would eliminate the need for dollars, and hence the need for attracting international finance capital and subjugating one’s economy to the dictates of imperialism.

The course being followed by the Modi government alas is altogether different. It is signing a spate of Freet Trade Agreements with various countries around the world, which can at best enlarge the volume of India’s trade, but would not necessarily increase net exports and hence the magnitude of domestic employment; and above all, such FTAs would not eliminate the thralldom of the economy to the dominance of globalized finance capital.