The Solution to the Falling Rupee Lies in Diplomacy | India’s Forex and Trade Strategy

Overview

• The Indian rupee has depreciated by approximately 6% since April 2025, entering 2026 at elevated levels (around ₹89–91/USD range in recent periods, with record lows crossed in late 2025).
• Despite strong domestic fundamentals, external pressures have driven the slide, shifting the challenge from purely economic to geopolitical/diplomatic dimensions.

Key Economic Indicators (Positive Domestic Fundamentals)

• Projected GDP growth for FY 2025–26: 7.4% (government estimate; some international forecasts slightly lower at 7.2–6.6% for 2026).
• CPI inflation: Ended 2025 at 1.33% (below RBI’s 4% target for the fourth successive month).
• Current Account Deficit (CAD): 0.76% of GDP in H1 FY 2025–26 (improved from 1.35% in the previous year; expected to widen modestly in 2026 due to tariff impacts).
• Trade deficit (April–December 2025): $96.58 billion (slight rise from $88.43 billion YoY).

Primary Causes of Depreciation

• Capital Outflows: Main driver — net capital inflows turned negative in 2025, with net outflow of $3,900 million (vs. inflow of $10,615 million in 2024). Record foreign portfolio investor (FPI) outflows from equities (highest on record in 2025, exceeding $17–18 billion in some estimates).
• US Tariffs on Indian Exports: Steep hikes (up to 50% on broad categories, among the highest globally; threats of further escalation, including up to 500% linked to Russian oil imports). Triggered uncertainty, reduced export predictability, and fueled outflows.
• Trade Imbalance: Widening deficit with the US (India’s largest trading partner); limited export gains from weaker rupee due to high import content in goods and existing US tariffs.

Impact on Economy

• Imports Become Costlier: Essential imports (e.g., crude oil ~25% of merchandise imports) turn expensive, with potential inflationary pass-through (though low current inflation provides cushion).
• Limited Export Benefit: Depreciation offers only marginal competitiveness boost amid high US duties and import dependence in export sectors.
• Broader Risks: Could erode purchasing power, affect investor sentiment, and widen CAD further (projections suggest 1.2–2%+ in 2026 if tariffs persist).

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