Iran War Depletes Asian FX Reserves: Philippines, India Hit Hardest as Oil Prices Surge

The Iran-Israel conflict is triggering a secondary energy shock that is reshaping foreign-exchange dynamics across Asia. Central banks in oil-importing nations, particularly the Philippines and India, are burning through hard-currency reserves in attempts to defend their currencies against dollar strength and petroleum-driven current-account deterioration. Hormuz oil flows fell nearly 30% in Q1 2026 according to the EIA, with crude prices rising sharply and forcing importers to spend more dollars on oil while earning fewer dollars from exports as global growth slows.

The Philippines and India are especially vulnerable because both countries run significant current-account deficits and depend on remittances and tourism revenue that have proven volatile during geopolitical stress. As oil prices surge, their import bills rise while their export demand softens. Central banks face a choice: allow currencies to weaken (which imports inflationThe rate at which prices rise across an economy. and reduces purchasing power) or defend the peg by selling reserves. Most have chosen the latter, leading to notable reserve declines visible in recent central bank balance sheets. India's reserves, though substantial in absolute terms, are shrinking month-over-month, while the Philippines' smaller reserve buffer is facing even sharper pressure.

This dynamic creates a cascading risk. If reserve drawdowns continue at the current pace, some central banks may run into reserve adequacy thresholds (typically 3-6 months of import cover), forcing them to implement either currency float, capital controls, or external financing (IMF programs). Bangladesh has already seen its credit outlook cut to negative by Fitch Ratings due to the Iran conflict's impact on its import burden. Fitch also noted rising inflationThe rate at which prices rise across an economy. pressures as central banks deplete reserves and currencies depreciate.

The implication for markets is bifurcated. EM currency weakness (versus the dollar) creates headwinds for local equity markets but tailwinds for EM exporters competing on cost. However, if the conflict persists and oil prices remain elevated, additional central banks may be forced into policy shifts (either currency float or capital controls) that could trigger broader EM volatility. Watch for any signs that India or Philippines central banks are considering formal policy shifts or seeking external financing.