India's central bank is fighting to stabilize the rupee as the US-Israeli conflict with Iran sends shockwaves through emerging markets. The Reserve Bank of India has burned through more than $20 billion in foreign exchange reserves since the war began, with the rupee hitting record lows and falling 2.3% against the dollar.

Beyond currency defense, the RBI has purchased 1 trillion rupees ($10.7 billion) in government bonds this month alone to support liquidity and the fixed income market. India's 10-year bond yield has climbed nearly 0.2 percentage points this year, while foreign investors have pulled out almost $10 billion from equity markets in 2025.

With India importing 90% of its crude oil and half its natural gas, soaring energy prices threaten what RBI governor Sanjay Malhotra called a "sweet spot" of strong growth and low inflation. Analysts warn that without intervention, the rupee could weaken to 95 per dollar, bond yields could rise to 7%, and corporate borrowing costs could surge. The central bank's ability to defend the currency may be limited if import cover falls below nine months, potentially forcing the rupee to absorb the full shock of regional instability.