Despite India's strong economy, the rupee is tanking. What's behind the disconnect?
Recently, the Indian rupee breached the psychological
barrier of 90 against the US dollar, marking ~5% depreciation since January
2025 and underperforming all major Asian currencies. This decline is
particularly striking, given favorable macroeconomic indicators: Inflation has
cooled to below 1% and GDP growth has accelerated to 8.2% in second quarter of
FY26. Under normal circumstances, such supportive fundamentals would be
expected to stabilize the currency. Yet, the rupee’s continued fall highlights a
divergence between India’s robust domestic performance and its external
vulnerabilities.
Delays in finalizing the trade agreement has eroded confidence in India’s export competitiveness, while episodes of global risk aversion have strengthened the dollar and amplified pressure on the rupee. Indian corporates’ strong demand for dollars to settle international obligations, especially in import-heavy sectors, further contributed to the currency’s slide. U.S. tariff actions and prolonged uncertainty around a US–India trade deal weighed on the Indian rupee this year mainly through sentiment and capital-flow channels rather than direct trade losses. The lack of clarity on export access and sector-specific duties reduced confidence in India’s external balance outlook, prompting foreign portfolio outflows where FPIs have shown consistent net outflows from Indian equity markets throughout FY26 reaching Rs. ~-41,284 crores, slower inflows, and higher corporate hedging demand for dollars. Meanwhile, a widening trade deficit, exacerbated by a sharp drop in exports and a surge in imports, including a temporary spike in gold imports, have added to market anxiety, although November saw some relief with a narrowing deficit and a rebound in exports.
The effects are wide-ranging: higher import prices, a bigger current account deficit, increased foreign debt costs, and more expensive overseas expenses for households and students. Import-heavy sectors like aviation, oil & gas, paints, chemicals and FMCG are under pressure, while exporters benefit but face rising costs. The RBI has managed the rupee’s depreciation by smoothing volatility rather than defending a fixed rate, and the currency’s real effective exchange rate (REER) has dropped from the record high of about 108 in Nov-24 to 97 in Oct-25 shifting from being overvalued to slightly undervalued. India’s core economic strength and central bank support suggest the rupee’s weakness is a temporary setback, not a threat to its growth story.
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