Any war, whatever the scale, brings destruction to material structures in towns and cities; for people it brings threats to survival or even death.
This is more than evident in the recent joint US-Israel attacks on Iran and Israel’s attacks on the Gaza strip, leaving masses of destroyed buildings and empty lands, along with homeless people facing endless miseries.
There must be some strong incentives which drive those who are responsible for the launch and continuation of wars. It includes the war preparations by the US government, say with US fiscal year 2026 recording an expenditure of $1.01 trillion. With the war on Iran announced in February 2026, the US president made a near 50% hike in defence spending by putting it at $1.5 trillion over fiscal 2027. “This budget builds this arsenal without compromising readiness that will ensure we remain the world’s premier fighting force, we protect the homeland, and we create peace through strength now and into the future,” US Secretary of War Pete Hegseth said.
Orders placed by the US Department of Defence (or Department of War as it is now known) for equipment and keeping the force ready are never provided at a cost price. The items certainly are delivered with a reasonable profit margin, contributing to some gain. A continuing war machinery thus works as assurance (like an insurance scheme) of continuing gains to at least one major part of the US industrial sector for the continued profits. Defence expenditure is currently at 3.2% of US GDP, and the industry, it is estimated, accounts for roughly 12% to 15% of all US manufacturing output. The industry carries significant weight for influencing public policies. In addition, added demand from the defence industry on products from the rest of the economy are also no less significant as expansionary vehicles in times of distress and austerity in the economy with the war. A continuing war has thus been meaningful for Donald Trump - gains realised by defence-related activities in the economy too can continue.
An ongoing war, with its disruptive consequences, also brings in prospects for fetching quick gains for traders, by operating in de-regulated markets. However, profits (or losses) on their transactions cannot happen in a stationary market, since markets need to be volatile in order to provide opportunities for traders to operate. A perfect backdrop is provided by the war, with its impact on the pace of fluctuations in prices of various assets in de-regulated markets. Traders use hedging instruments like futures and options to minimise losses and maximise gains on transactions. Transactions which are most popular relate to the short term financial assets (stocks or shares in common parlance) denominated in any currency including that of the host country. Incidentally, changes in financial asset inflows from abroad denominated in hard currency (like the US dollar) affects the level of foreign exchange reserves in the host country.
Where India stands
Another aspect relates to the impact of the war, both for the macroeconomic status of a typical developing economy in the global south (like India) and the impact on residents who face the consequences by paying for the war. As for the macroeconomic status for India, which like many others has been facing the impact of the war, the major concerns at the moment are:
(i) a steep depreciation of the rupee over a month, from Rs 94.25 to a dollar on April 25 to Rs 96.57 on May 19. The rupee was much stronger a decade ago, with the rate hovering around Rs 60 to Rs 62 in 2014.
(ii) The other change which was of concern relates to the sharp decline in official foreign exchange reserves, from $692.5 billion on November 14, 2025 to $698.3 billion on March 20, 2026, and to $696.9 billion on May 8, 2026. It declined to $688.89 billion on May 22 of the same year.
Declining official reserves do generate expectations of further depreciations in exchange rates . Thus movements in the two variables - official reserves and the exchange rate - reinforce each other. In other words a drop in official reserves is a clear signal for speculators that the exchange rate of the currency may also drop.
What caused the reserve to decline? The answer lies in the rising current account deficit, due to trade deficits and declining remittances from West Asia with higher freights on imports in dollar terms. This has been the case since well before the war, the war has increased the slide. There has been a fast retreat of portfolio capital led by the FIIs, with FII outflows crossing Rs 2 lakh crore in the first four months of 2026. Fast retreat of portfolio capital led by the FIIs in Q1 contributed to a negative sum of net portfolio flows at (-)$133 billion which, supported by positive flows of net FDI at (+)$4.31 billion, made for the net capital flows at (-)$9 billion.
Is this a balance of payments crisis?
Continuous downsliding of the rupee rate and recent depletions of exchange reserves have led the country's central bank, the RBI, to take measures which immediately pushed up the rupee rate of a dollar on May 25 to Rs 95.26 - as compared to Rs 96.27 just one week before, on May 18. The push was achieved by the RBI's spot sale of $2 billion to $3 billion, of foreign currency from the reserves by using state-owned banks while arranging for a buy/sell swap of $5 billion to manage liquidity supply at banks without having any pressure on interest rate hikes.
Foreign exchange held as official reserves touched $688.89 billion on May 22 of this year, which can be considered as reasonably large. This is so especially since it is stored with a precautionary motive which prevails for inconvertible currencies like the rupee. Use of a part of the reserves which is kept for emergencies is thus a justifiable move on part of the policymaker under managed floating of the currency, and the RBI had used this tool on earlier occasions as well.
But what remains as the potential threat which can recur? It relates to the sudden drop in net capital flows, which can prove inadequate to finance rising current account deficits. While the rising deficits in the current account are related to the disrupted flows of remittances from West Asia and the rise in dollar prices of oil as well as of other imports, which may continue as long as the war is allowed to continue (effectively by those who gain). The use of hedging instruments has added considerably to the flows of short term finance from overseas. In effect, there remains the potential threat which cannot be ignored. This requires policy measures of capital control, with some stabilising announcements which dampen speculation-led hedging and further volatility in short term portfolio flows. A similar need is there to regulate volatility in gold or other commodity markets operating within the country.
The need for regulatory reforms is particularly urgent in view of those who at the moment are faced with a crisis, in India and in the rest of the world. It can also be mutually beneficial for the section of corporate capital which has less involvement in profiting from the war machinery.
We hope there can be a consensus on the matter, to protect humanity in different parts of the world.
Sunanda Sen has been a Professor in Jawaharlal Nehru University, New Delhi.