On Sunday, 10th May, prime minister (PM) Narendra Modi, speaking at a political rally in Hyderabad asked citizens to stop buying gold for a year. He also asked them to work from home; cancel foreign vacations and carpool to work.
It has been a while since any PM has made such public appeals to address economic concerns. Indeed, politicians like to pretend, until the last moment, that everything is normal and their government has things under control. So, is the situation worse than it appears?
For many weeks now, the weak rupee and expensive oil has made headline news. The PM’s speech indicates that the government has probably used up all its market tools and is preparing citizens for a set of austerity measures that will be applied through administrative tools. This explainer analyses the situation and the risks arising from the Middle-East stalemate.
PART 1 – WHAT LED US HERE
It Started with a Waterway
In late-February 2026, the Strait of Hormuz, a narrow strait through which roughly one-fifth of the world's oil passes every day, was closed to commercial shipping after war Israel and the United States (US) attacked Iran. The International Energy Agency estimates the closure removed around 14mn (million) barrels/day of oil from accessible global supply.
Brent crude, which was priced in the US$70–US$80 range through 2025, shot up to US$100–US$115 and has stayed there.
India's oil import basket price jumped from US$69/barrel in February to US$105 by May, a 52% rise in under three months. India imports approximately 85% of the oil it consumes. Roughly half of that transited through the Strait of Hormuz. In FY25-26, India spent US$174.9bn (billion) on crude and petroleum products, accounting for 22% of our entire import bill. Every US$10 rise in Brent prices adds US$15bn–US$20bn to this annual number.
How Oil Becomes a Rupee Problem
India buys oil in US dollars. When the oil bill rises faster than export receipts and remittances, importers need to buy dollars, so the demand for dollars rises and the rupee weakens.
The rupee started 2026 at ₹85.64 to the US dollar; breached ₹90 in early-March and hit a record low of ₹95.63 this week. That is 11% depreciation in under five months. The rupee is the worst performer among Asian currencies this year. The Chinese yuan has actually appreciated 1.4% over the same period, while the Thai baht is down only 3.5%.
The Reserve Drawdown
The Reserve Bank of India (RBI) has been intervened in the money markets to slow the rupee's fall at a cost. India's foreign exchange reserves, which stood at US$728.5bn at the end of February 2026 (before the war) had dropped to US$690.7bn by 1st May—a US$38bn drop in nine weeks. The steepest single-week decline week of US$7.79bn was in the week of 1 May alone. Of that, US$5bn came out of gold reserves, which we will come to soon.
A US$690bn reserve still covers 10 to 11 months of imports which is well above the three-month minimum that economists typically flag as a warning. But if the Reserve Bank of India (RBI) is burning US$5bn-US$8bn per week, US$690bn covers roughly 17–19 weeks – it is a number that calls for quick contingency plans.
The Hidden Subsidy
India has not raised petrol or diesel prices despite oil prices doubling. The gap is being financed by the oil marketing companies: Indian Oil, BPCL, HPCL. These companies are losing ₹1,000 crore every day. The cost of under-recoveries in Q1FY25-26 alone may be close to ₹2 lakh crore. The government cannot let this run indefinitely. A fuel price hike is the largest single unannounced policy decision hanging over the economy right now.
The Double Squeeze: It Is Not Just Imports
What makes this a double whammy is that the oil shock has coincided with a sharp slowdown in dollar inflows. Foreign portfolio investors (FPIs) have pulled out roughly US$21bn from Indian equities in 2026 to date. FDI flows have moderated from their recent peaks. A rising current account deficit plus weaker capital inflows opens up a nearly US$68bn balance-of-payments gap, says Nomura, an international brokerage firm.
Rating agency CRISIL has already revised its India economic outlook: GDP growth slowing to 6.6% in FY26-27, retail inflation averaging 5.1%, and its Brent crude forecast revised upward to US$90–US95 per barrel up from an earlier estimate of US$82–US$87.
There is one number that explains why India is in this position. The Current Account Deficit, or CAD.
PART 2 - THE CURRENT ACCOUNT DEFICIT: THE NUMBER THAT EXPLAINS EVERYTHING
Why did the PM ask people not to buy gold, work from home and use less fuel? One metric explains it all: the current account deficit (CAD). CAD is simply the scorecard of everything India earns from the world versus everything it pays the world. Exports, services, remittances on one side. Imports, interest payments, outward transfers on the other. When the outflows exceed the inflows, we have a deficit. India runs one almost every year. The question is always: How wide is it and can it be financed?
In FY25-26, India's CAD was running at roughly 1% of GDP, a range that markets and policy-makers considered comfortable. That number is being revised sharply upward after the global crisis. With Brent crude above US$100 and cost of import jumping from US$69 to US$05/barrel since February, CRISIL now projects the CAD widening to around 2% of GDP in FY26-27. This is driven almost entirely by the oil import bill.
To understand the scale: India's US$174.9bn crude and petroleum import bill in FY25-26 already represented 22% of the entire import bill. Every US$10 sustained rise in oil adds US$15–US$20 bn to that annual figure. The Hormuz closure has effectively imposed a permanent surcharge on every barrel India buys. That surcharge flows directly into the CAD.
But oil alone does not explain the full structural vulnerability. India runs a perennial trade deficit. It exports far less than it imports. The services surplus, primarily IT and business process exports, partially offsets this. Remittances from the Indian diaspora add another buffer. But the goods trade deficit has historically been too large for services and remittances to fully cover, leaving India reliant on capital inflows FDI (foreign direct investment) and portfolio investment — to bridge the gap.
That bridging mechanism is now under stress on both sides simultaneously. The oil shock has widened the trade deficit sharply. At the same time, foreign portfolio investors have pulled out roughly US$21bn from Indian equities in 2026, and FDI inflows have moderated from recent peaks. Brokerage Nomura estimates the combination opens up a nearly $68 billion balance-of-payments gap for the current cycle — the difference between what India needs in dollar inflows and what it is actually receiving. Standard Chartered describes a potential third consecutive year of overall BoP deficits as 'unprecedented' in India's post-liberalisation history.
A current account deficit, on its own, is financeable as long as capital keeps flowing in. What makes this moment different is that the deficit is widening precisely as the financing is weakening. The two pressures are simultaneous. RBI is spending reserves to fill the gap which is why the US$38 bn drawdown in nine weeks is the most important data point in this crisis.
Gold is part of this this story as a long-running aggravator. Crude oil is the dominant driver of India's CAD, but gold is the largest discretionary drain the import that could theoretically be reduced by policy or behaviour change, unlike oil which has no short-term substitute. Over the past 14–15 years, India's gold import bills have cumulatively absorbed a sum comparable to the entire net FDI the country received over the same period. Capital attracted with one hand; physical gold purchased with the other. That is the structural imbalance the PM's appeals are attempting to address, even if only at the margins.
PART 3 - THE GOLD PROBLEM IS MORE COMPLICATED THAN IT LOOKS
The PM's request to pause gold purchases attracted the most attention of anything in his speeches. Understanding why it is economically logical and politically fraught requires going deeper than the headlines.
Gold Is Not an Ordinary Import
India is one of the world's largest gold importers. The FY24-25 gold import bill exceeded US$50bn. In FY26, with gold prices sharply higher, projections suggest it could approach US$80bn–US$90bn, though this remains an estimate rather than confirmed data.
Gold matters to India's macro balance in a way that electronics or machinery do not: it is a discretionary import with no industrial necessity argument. When the PM asks citizens to pause gold purchases, he is asking them to defer a discretionary dollar outflow. On paper, every billion dollars not spent on gold is a billion dollars that stays in the reserve buffer.
But gold also functions as something more than a consumption item. For tens of millions of Indian households, gold is the primary savings vehicle, an inflation hedge, and a currency hedge. Had you put US$100 into gold in 2010, that US$100 would be worth approximately US$384 today. Had you put US$100 into rupees in 2010, currency depreciation would have eroded it to roughly US$47 in dollar terms. Gold imports persist because Indian households have repeatedly found that gold protects wealth in a way rupee-denominated instruments have not always done.
This creates a macro paradox: the very dollar weakness that makes gold imports economically damaging also makes gold more attractive to households as a hedge against that same dollar weakness.
The 15-year Structural Drain
Over the past 14–15 years, India's cumulative current account deficit has been substantial. Gold imports after crude oil represent the single largest non-energy structural drain on India's foreign exchange over this period.
The irony of the FDI story compounds this. India has attracted hundreds of billions of dollars in foreign direct and portfolio investment over the same period. In a sense, India has been attracting capital with one hand and sending it abroad to buy gold with the other. Capital comes in as financial flows; it exits in the form of a physical store of value. As FDI flows have moderated and as foreign portfolio investors have turned net sellers, the cushion that made this equation manageable has thinned.
The Policy Options — And Why None of Them Is Clean
Option A: Higher gold import duties. The most obvious lever. Make gold more expensive to import officially, and demand should fall. The problem is that raising import duties does not reduce gold demand in India. When formal import costs rise sharply, the smuggling premium on physical gold increases and grey-market channels absorb the demand. The options are expand domestic financial alternatives: Sovereign Gold Bonds, gold monetization schemes, gold ETFs — instruments that absorb the savings demand for gold. But the consumption demand remains.
Option B: RBI sells its gold reserves. RBI holds approximately 880.5 tonnes of gold, making it one of the larger central bank gold holders in the world. Gold now comprises roughly 16.7% of India's total forex reserves a materially higher share than a few years ago. One argument is sell a portion of that gold, bring dollars into the system, and ease both reserve pressure and rupee depreciation simultaneously.
The counter-argument is that central bank gold is strategic. It is not held for liquidity management the way dollar bonds are. In the current geopolitical environment, after Russia's foreign exchange reserves were frozen following the Ukraine invasion, central banks globally have been accumulating gold, not liquidating it. RBI has itself been buying and repatriating gold moving approximately 104 tonnes back to domestic vaults in H2FY25-26 alone, and 168 tonnes cumulatively over three years. A central bank that has been actively building and domesticating its gold position is unlikely to reverse course and liquidate under external pressure which some feel is temporary.
PART 3 —WHAT COMES NEXT
Governments under external payment pressure follow a standard sequence. Each step is more intrusive than the last.
Step 1 - Market Intervention: RBI sells dollars and buys rupees. Continuous since March. The US$38bn drawdown in nine weeks is the visible cost of this step.
Step 2 - Restrict Currency Speculation: RBI capped banks' daily open foreign exchange positions at US$100mn. It temporarily asked lenders to stop offering non-deliverable forwards to non-resident counterparties before withdrawing that instruction. Both happened in the last two months.
Step 3 - Tighten Dollar Flow Rules: Reports indicate RBI is considering requiring exporters to repatriate dollar receipts immediately rather than parking them offshore, and changing hedging rules for importers. This is administrative tightening rather than market intervention it forces dollars back into the system rather than letting them sit in offshore accounts.
Step 4 - Public Appeals: The PM's direct appeal to citizens is Step 4 in this ladder. It is also accompanied by institutional signalling: Defence minister Rajnath Singh chaired the 5th informal group of ministers on Monday, confirming the national mission framing and revealing the reserve buffer (60 days of crude, 60 days of natural gas, US$703 billion in forex).
Options under active consideration as of this week reported by Bloomberg and Reuters include a dollar deposit scheme for non-resident Indians and tax tweaks to attract foreign debt investors. Standard Chartered estimates RBI may need to offer a roughly 2.75 percentage point subsidy over prevailing swap rates for NRI (non-resident Indian) deposits implying a cost of about $800 million for every $10 billion raised. That is not cheap. And it may be less effective than in 2013, when near-zero US interest rates made the arbitrage more attractive.
Step 5 - Administrative Restrictions: This is the step being openly discussed.
• Higher gold import duties - with the smuggling caveat described above
• Quantitative limits on electronics imports - smartphones, laptops, televisions; India's electronics import bill runs into tens of billions annually, and domestic assembly capacity under the PLI (production linked incentive) scheme is not yet large enough to absorb a meaningful restriction
• Mandatory pre-import licensing for non-essential goods
• Curbs on outward foreign exchange remittance - restrictions on foreign travel spending, overseas education transfers, and discretionary dollar payments
These are measures the authorities could deploy if voluntary citizen action proves insufficient. Travel, foreign exchange card businesses, and overseas education platforms carry real policy risk if Step 5 arrives.
PART 4 - THREE RECENT DEVELOPMENTS THAT DEEPEN THE RISK
1. Aramco Warns of 'Critically Low' Global Fuel Stocks
Saudi Aramco CEO Amin Nasser warned this week that global gasoline and jet fuel inventories are depleting rapidly and could reach critically low levels before the summer driving and travel season the highest demand period of the year.
The Hormuz closure has forced reliance on limited alternatives like Saudi Arabia's East-West pipeline, which does not have the capacity to replace what the strait was moving. The inventory drawdown is accelerating precisely as seasonal demand picks up. Aramco's timeline is the most important data point in this crisis in weeks: it expects oil markets to take until 2027 to normalize even if flows resume.
For India specifically, Saudi Arabia accounts for 14%–20% of total crude imports and is one of India's top three suppliers. The possibility of supply tightening not just price pressure at the source level adds a dimension beyond pure cost management.
Markets have been pricing in periodic ceasefire optimism. Aramco is telling you that the US$100+ oil environment is not transitory. If that timeline holds, the entire policy escalation stack every step on the ladder above moves faster and further.
2. India-bound Fertiliser Shipment Scrapped over Iran Links
An India-bound urea cargo aboard the bulk carrier Infinity, of Aditya Birla Global Trading (Singapore), was scrapped after officials raised concerns over links to Iran, reports Bloomberg.
This incident adds a dimension that the PM's speeches on fertiliser use only hinted at. When Modi asked farmers to reduce chemical fertiliser use by 50%, it was presented as an economic and environmental measure. The supply chain evidence suggests it may also reflect a real constraint emerging not just demand management.
India's fertiliser stock position remains healthy today: 19.96mn tonnes as of 11th May up from 17.85mn tonnes a year earlier. But the supply chain is becoming more fragile. Sourcing routes are narrowing. And urea is not a discretionary import it is food security infrastructure. Any sustained disruption has consequences that run well beyond the balance of payments.
3. India Turned away a Sanctioned Russian LNG Cargo
A ship carrying 60,000 tonnes of Russian LNG the tanker Kunpeng departed Russia's Baltic Portovaya plant in April, bound for India's Dahej LNG terminal. Indian buyers and terminal operators refused to accept it. The vessel is now drifting near Singapore with no clear destination.
India continued buying Russian oil throughout the crisis and Washington even issued temporary 30-day waivers in March to allow it. But LNG is different. The Trump administration sanctioned over 180 vessels in Russia's shadow fleet in January and explicitly warned that any foreign financial institution doing business with sanctioned Russian LNG faces secondary sanctions. Indian banks and terminal operators chose compliance over the discounted cargo.
As Hormuz remains closed and India scrambles for alternative energy sources, one of the few available buffers — discounted Russian energy is being closed off not by India's choice but by the sanctions. The global energy system is fragmenting along sanctions lines, and India is being forced to choose which risks it is willing to absorb and which it is not.
WHAT TO WATCH
- Oil price relative to US$100. Sustained below is the relief path. Sustained above especially if Aramco's 2027 timeline holds — means the escalation continues.
- RBI weekly reserve supplement (released every Friday). Weekly drawdown above US$5bn means the ladder moves faster. The US$7.79bn week ending 1 May is the number to beat downward.
- Any formal notification from the ministry of finance or DGFT (directorate general of foreign trade) on import policy.
- Fuel price decision. With major state elections behind it, the government has political headroom to act. A hike would signal that the subsidy model has reached its limit.
- PM's next address. If language shifts from voluntary appeal to administrative directive, things have worsened.
India is not in a 1991-style solvency crisis. The reserve base, the services export, remittances and the financial system are much stronger than 1991. What India is in for is a sustained external stress that is escalating methodically through an oil shock, a gold-driven dollar drain, slowing capital inflows, and a global energy system fragmenting along sanctions. The PM's speech was the symptom. The question for the next four weeks is whether there is a resolution to the Hormuz before Step 5 arrives. If there is, a catastrophe will be averted. Even then, there will be inflationary shocks for many more months to come including interest rate hikes.
