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World Bank Recognizes RBI's Currency Strategy Amid Geopolitical Turmoil
The World Bank has praised the Reserve Bank of India's (RBI) approach to managing the rupee's exchange rate amid the escalating conflict in West Asia. Aurélien Kruse, Lead Country Economist for India at the World Bank, stated on Thursday that the central bank's consistent policy of managing short-term volatility while allowing market forces to guide the rupee's broader trajectory "makes a lot of sense." This perspective comes as the rupee experienced significant pressure, falling past 95 to the dollar in March due to investor caution stemming from the US-Iran conflict. Despite the RBI's interventions, the USD/INR exchange rate reached a historic high of 99.82 in March 2026, and was trading at 92.8230 on April 9, 2026.
India's Growth Forecast Raised, But Inflation Concerns Linger
The World Bank revised its GDP growth forecast for India's current fiscal year to 6.6%, a 30 basis point increase. This upgrade is attributed to robust domestic demand and recent trade agreements, including a deal with the European Union finalized in January 2026 and another with the US in February 2026. The World Bank anticipates India's GDP to grow to 7.2% in 2027-28 and 7% in 2028-29. However, a key divergence exists in their assumptions for crude oil prices: the World Bank considers $90-100 per barrel for 2026-27, contrasting with the RBI's $85 per barrel assumption. The World Bank also projects retail inflation to rise to 4.9%, exceeding the RBI's 4.6% estimate. Goldman Sachs, previously forecasting 7% growth for 2026, has since lowered its estimate to 5.9% due to ongoing disruption of oil supplies and rupee weakness, while also anticipating a 50 basis point rate hike to counter inflation.
Record Investor Outflows and Market Valuations Raise Red Flags
Significant concerns persist despite the World Bank's conditional optimism. March 2026 witnessed a record outflow of Rs 1.14 lakh crore ($12.7 billion) from Indian equities by Foreign Portfolio Investors (FPIs). This exodus, the largest monthly sell-off on record, was driven by heightened geopolitical tensions in West Asia, a weakening rupee, and the impact of elevated crude oil prices. The rupee's decline eroded dollar-denominated returns, making emerging market assets less attractive. This selling pressure contributed to a sharp 11% decline in benchmark indices like the Nifty and Sensex in March, marking their worst monthly performance in six years.
India's market capitalization stood at $4.395 trillion in March 2026, down from $5.091 trillion the previous month, marking the steepest drop in 15 years. The Nifty 50's Price-to-Earnings (P/E) ratio stood at approximately 20.32 as of April 7, 2026. While this valuation is not excessively high compared to historical averages, it faces pressure from macroeconomic uncertainties and substantial FPI withdrawals. For comparison, the MSCI Emerging Markets Index trades at a P/E of around 14.5, indicating India's market is valued at a premium.
Furthermore, the World Bank itself acknowledged "massive" downside risks to the growth outlook. The effective closure of the Strait of Hormuz, a critical oil transit route, following US-Israeli strikes on Iran, has disrupted global energy supplies, pushing Brent crude prices above $100 per barrel. This volatility directly impacts India, a major energy importer, widening its current account deficit and increasing inflation. While the recent US-Iran ceasefire has offered temporary relief, concerns remain about its durability and the potential for renewed supply disruptions.
RBI Intervenes to Stabilize Rupee Amidst Outflows
The RBI's policy of managing exchange rate volatility without targeting a specific level has been consistent. Governor Sanjay Malhotra reiterated that interventions aim to smooth excessive volatility, not to defend a particular rupee level. In late March, the RBI implemented measures to curb speculation, including capping banks' net open foreign-exchange positions and tightening norms for forex derivative contracts. These actions followed a period of increased rupee weakness, where it depreciated nearly 10% against the dollar in FY26. While these measures have led to some appreciation in recent days, the underlying pressures from FPI outflows and geopolitical instability continue to challenge currency stability. The World Bank noted that India entered the recent crisis with strong buffers, including low inflation and a low current account deficit, and that its largely rupee-denominated debt is a positive factor for stability. However, the sustained record outflows and geopolitical risks continue to challenge currency stability moving forward.
Future Outlook Tempered by Global Factors
Looking ahead, the World Bank projects India's GDP growth to moderate to 6.6% in FY27, citing challenges from the Middle East conflict and elevated global energy prices. While recent trade deals with the EU and US could offer some support by improving export access, slower growth in major trading partners may temper these benefits. Geopolitical stability, commodity prices, FPI flows, and RBI policy will shape India's economic path and currency performance.