In contrast to the 1991 oil shock, when India's reserves were practically non-existent, it can now draw upon Asia's sixth-largest holdings to help counteract record prices of oil, its biggest import.
Analysts said the central bank was unlikely to let the partially convertible rupee weaken past 46.50 per dollar, a near 13-month low struck on July 30, when dealers cited aggressive dollar-selling intervention.
With oil prices still within sight of $50 a barrel, India's already expanding trade deficit is at risk of widening further. Officials say the crude import bill could jump to $27 billion in the financial year to March 2005 from $20 billion a year before.
That in turn would weigh on the rupee, and a weaker local currency would fuel inflationary pressures by making imports costlier.
Wholesale price inflation hit a three-and-a-half-year high of 7.96 percent in the year to August 7. And a nation-wide truck strike, already into its sixth day, could worsen the outlook by driving up food prices and supply costs for factories.
"In the current inflationary scenario, authorities will try and rein it in by checking the rupee's weakness at around current levels," said Siddharth Mathur, strategist at J.P. Morgan. The rupee is now trading around 46.35 per dollar.
"The forex reserves are comfortable and they should be used in containing inflation," he said.
Authorities are not likely to raise interest rates from 30-year lows or tighten money supply for fear of choking off demand in the farm-dependent economy, already grappling with an erratic monsoon.
"The government will be loath to compromise strong growth and investment through monetary tightening," said Dominique Dwor-Frecaut, strategist at Barclays Capital, Singapore. "Given these dynamics, the policy response to rising inflation is likely to be dovish and limited to defending the rupee at 46.50 per dollar."
A $10 per barrel rise in crude can shave 1 percent off gross domestic product, Kotak Mahindra Bank said in a recent report.