India's forex reserves dropped from record $728.49 billion (February 2026) to $690.69 billion (May 2026) due to RBI intervention amid oil price surge. Crude oil up 72% annually, rupee depreciated 5.1%, hitting $94.5/dollar. Current Account Deficit projected at $88 billion (2.1% GDP) in FY27, highest since 2013 'Fragile Five' crisis. ADB forecasts inflation at 6.9%, breaching RBI's 6% tolerance. FPI outflows exceed $20 billion in first four months of 2026.

This crisis reflects India's structural vulnerability as an oil-importing economy meeting 85-87% crude requirements externally. The CAD widening to 2.1% GDP mirrors the 2013 'Fragile Five' episode when emerging markets faced capital flight. RBI's forex intervention to defend the rupee is depleting reserves by $38 billion in three months, limiting future policy space. The PM's appeal for import conservation signals government concern about balance of payments pressures. At $100/barrel oil, CAD hits 1.5%; at $120-130, it could breach 2%. This creates a policy trilemma: defend currency (depletes reserves), raise rates (hurts growth), or let rupee weaken (imported inflation). Unlike 2013, India has better fundamentals but faces global headwinds from geopolitical tensions in West Asia affecting energy supplies. The stagflation risk emerges from simultaneous inflation acceleration and growth deceleration. Policy options include LRS restrictions, gold import curbs, and FCNR deposit mobilization, but effectiveness depends on global liquidity conditions and investor risk appetite.