India holds nearly $689 billion in foreign exchange reserves, among the world's largest, yet remains structurally vulnerable to dollar dependence. Effective usable reserves are closer to $588 billion after netting RBI forward commitments. External debt stands at $766 billion, over half dollar-denominated. The 2026 Strait of Hormuz closure drained $40 billion in ten weeks, pushed the rupee to a record low of ₹96.82 per dollar, and exposed how oil shocks, capital outflows, and exchange rate pressure simultaneously erode external buffers.

India's dollar vulnerability is not a crisis-level imbalance but a structural liquidity risk embedded in a dollar-centred global financial architecture. Three reinforcing mechanisms create this exposure. First, 'original sin' — a term coined by Eichengreen and Hausmann — refers to emerging economies' inability to borrow internationally in their own currency. India's $420 billion in dollar-denominated external debt means every rupee depreciation mechanically raises domestic debt-servicing costs. Second, the dominant currency paradigm ensures that India's import prices are set in dollars regardless of bilateral rupee movements, so depreciation widens the import bill rather than correcting the trade deficit. Third, the dollar's 90% share in global FX transactions (BIS 2025) means that any global risk-off event simultaneously tightens trade financing, triggers portfolio outflows, and intensifies exchange rate pressure — three transmission channels of a single structural vulnerability. The Strait of Hormuz shock in 2026 illustrated all three simultaneously: Brent crude surged from $75 to $138 per barrel, foreign portfolio investors withdrew $21 billion in two months, and the rupee fell to a record low. India's reserves-to-external-debt ratio has stayed below 100% for 13 consecutive quarters, signalling that liabilities are outpacing accumulation. Policy solutions — rupee internationalisation through Special Rupee Vostro Accounts, export sophistication, and energy import reduction — exist but remain far from scale relative to China's renminbi internationalisation benchmark.