Asian Forex Reserves Plunge as Iran War Oil Shock Drains Philippines and India Most

Foreign-exchange reserves are draining across Asia at an accelerating pace as central banks deploy billions of dollars to shield their currencies from the cascading effects of oil prices above $100 per barrel, driven by the ongoing US-Iran conflict. The depletion reflects both aggressive currency intervention by monetary authorities and valuation losses on non-dollar assets as the greenback surges.

Philippines and India Lead Reserve Drawdown

The Philippines has suffered the worst erosion among major Asian economies, with forex reserves plummeting 8.1% to $104 billion since the conflict erupted in late February. India follows closely behind with a 5.2% decline to $691 billion, while Indonesia has seen reserves fall 3.8% to $146 billion, according to data compiled by Bloomberg.

The sharp drawdowns underscore Asia's vulnerability as the world's largest energy-importing region. Most crude oil from the Persian Gulf—roughly 20% of global supply—transits the Strait of Hormuz, which Iran closed in early March, triggering a supply crisis that has kept Brent crude stubbornly above $100 per barrel for over two months.

"These big oil importing nations could start running out of foreign exchange reserves, which would cause investors to lose faith in the economy and start moving money out of the country," warned analysts at ANZ Banking Group. The bank noted that several Asian currencies have already hit record lows amid sustained capital outflows.

Import Cover Ratios Deteriorate Sharply

The reserve drain has significantly weakened the region's import cover—a critical metric measuring how many months of imports a country can finance using its forex stockpile. According to calculations by BNY Mellon, the Philippines' import cover has collapsed from 9.9 months to just 8.2 months, while South Korea's has fallen from 8.2 months to 6.9 months.

"Import cover across several Asian economies has deteriorated in recent months mainly because of higher import bills, especially for energy," said Wee Khoon Chong, Asia-Pacific macro strategist at BNY in Hong Kong. "With crude oil prices still elevated, central banks are expected to continue intervening in currency markets in a restrained manner."

A lower import cover could eventually force policymakers to maintain tighter monetary conditions even as growth slows, creating a painful stagflationary environment for export-dependent Asian economies.

Rupee, Peso, Rupiah Hit Record Lows

Despite aggressive intervention, Asian currencies continue to weaken. The Indian rupee (USD/INR) hit a fresh record low of 95.75 per dollar earlier this week, making it the worst-performing Asian currency in 2026 and the second-worst since the Iran war began. The Philippine peso breached the psychologically critical 60-per-dollar level despite repeated central bank dollar sales, while the Indonesian rupiah slumped to 17,534 per dollar—its lowest level ever.

The Reserve Bank of India has introduced emergency measures including tighter limits on banks' daily open forex positions to curb speculative attacks on the rupee. On Tuesday, India raised import duties on gold and silver in an effort to reduce bullion imports and preserve dollar reserves. Government officials are reportedly considering additional emergency steps, including potential fuel price increases to reduce demand.

In the Philippines, Bangko Sentral ng Pilipinas raised benchmark interest rates last month and signaled further tightening could be on the table if currency pressures persist. Indonesia's Bank Indonesia pledged "smart interventions" and is using the full range of tools—spot transactions, offshore and domestic non-deliverable forwards, and government bond purchases—to support the rupiah.

Oil Supply Shock Deepens

The International Energy Agency delivered a sobering update Tuesday, projecting that global oil supply will fall by approximately 3.9 million barrels per day across 2026 due to the Iran war—more than double its previous forecast of a 1.5 million bpd drop. The revision reflects prolonged disruptions to Iranian production and export infrastructure, as well as secondary effects on Iraqi and Kuwaiti output.

The supply crunch is forcing Asian importers to pay premium prices for alternative supplies from the Atlantic Basin, further straining current account balances and accelerating reserve depletion. Energy-dependent economies like India, the Philippines, Thailand, and South Korea face import bills that have surged 40-60% compared to pre-war levels.

Capital Flight Accelerates

Foreign portfolio investors have pulled billions from Asian equity and bond markets since March, exacerbating currency weakness. India has seen approximately $18 billion in foreign institutional investor outflows year-to-date, while Indonesia recorded $4.2 billion in exits from stocks and bonds in April alone.

The sell-off reflects investor concerns that elevated oil prices will erode corporate profitability, stoke inflation, and force hawkish policy pivots by regional central banks. Goldman Sachs trimmed 2026 growth forecasts for Japan and several Southeast Asian countries earlier this month while raising cpi" title="Understanding inflation and CPI in forex">inflation expectations.

"Asian economies, including India, have built up reserves as a first line of defense—their macro fundamentals are also stronger today—but they are also typically large oil importers," said Duvvuri Subbarao, former RBI governor. "Exports which have been the main growth driver of Asian economies are going to be hit."

Rate Hike Cycle Looms

The persistent currency weakness is forcing a painful policy dilemma: central banks must choose between supporting growth through lower rates or defending currencies and containing inflation through tighter policy. Most analysts expect the latter will prevail.

"The decline in reserves across Asia is making policymakers more cautious and could eventually lead to tighter monetary settings in some economies," said Khoon Goh, head of Asia research at ANZ in Singapore. "Although authorities may use other tools to manage the situation, more central banks in the region may ultimately have to raise interest rates to contain inflationary pressures and reduce stress on their currencies."

The Federal Reserve's hawkish stance and elevated US Treasury yields are compounding the problem by making dollar-denominated assets more attractive, further fueling capital flight from emerging Asia.

Outlook: Reserves Under Sustained Pressure

With no clear end to the Iran conflict in sight and oil prices showing little sign of moderating, forex reserves across Asia face sustained pressure in the months ahead. Mitul Kotecha, head of Asian FX and rates strategy at Barclays, noted that "central banks will be reluctant to sell down reserves" given the erosion already suffered, suggesting authorities may increasingly turn to capital controls, import restrictions, or aggressive rate hikes.

The reserve depletion raises uncomfortable parallels to the 1997-98 Asian financial crisis, though most economists argue the region's fundamentals remain far stronger today. Still, prolonged oil price elevation combined with deteriorating import cover ratios could test that resilience in coming quarters.

For currency traders, the message is clear: position carefully in Asian emerging market FX. Volatility is likely to remain elevated, and further intervention-driven moves could create whipsaws. Watch import cover metrics, central bank commentary on reserve adequacy, and crude oil price action for signals of whether the worst is over—or still ahead.