Budget 2026: Capital inflows, fiscal credibility takes centre stage as rupee slides

Indian Rupee

• Rupee falls from 86 to nearly 92 per dollar, increasing risks before Budget 2026
• Budget may focus on attracting foreign capital and supporting exports
• Tax changes and fiscal discipline expected to reassure global investors

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The rupee’s slide over the past few months has turned the external sector into a key macro risk just as the government prepares for Budget 2026. With capital flows turning volatile, foreign investors pulling money out of Indian equities and global uncertainty weighing on emerging market currencies, economists say the Budget will be closely watched for signals on how India plans to shore up investor confidence, attract foreign capital and maintain fiscal credibility.

The rupee has weakened significantly in recent months, moving from around 86 to nearly 92 against the US dollar, driven by a mix of external and domestic pressures. These include delays in the India-US trade deal, sustained foreign institutional investor (FII) outflows, heavy dollar demand from importers and relatively limited intervention by the Reserve Bank of India (RBI). The currency is currently trading near 91.73 to the dollar.

Economists point out that the depreciation is no longer just a currency story but a reflection of stress in India’s balance of payments. Gaura Sengupta, an economist at IDFC First Bank, said the capital account turned negative in the third quarter of FY26, amplifying pressure on the rupee.

“The depreciation pressure on the rupee reflects the BoP deficit, with the capital account turning negative in Q3 FY26. The Budget is expected to focus on measures to support capital inflows,” Sengupta said.

Against this backdrop, Budget 2026 is expected to place renewed emphasis on attracting stable foreign capital. Measures such as enhancing foreign direct investment (FDI) limits in select sectors and offering tax incentives to overseas investors are likely to be considered.

Economists also expect the government to double down on its investment-led growth strategy through higher on-budget capital expenditure and policies aimed at crowding in private investment.

Support for exports is another area likely to gain prominence. With global demand remaining uneven, the government may announce targeted measures to diversify export markets for both merchandise and services, reducing dependence on a narrow set of geographies and improving resilience to external shocks.

Tax policy could also play a role in calming volatile portfolio flows. Madhavankutty G, group chief economist at Canara Bank said changes in withholding taxes and capital gains tax could help ease concerns among foreign investors and slow FII outflows.

“Some changes in the tax structure, especially on withholding taxes and capital gains tax, can be expected to alleviate concerns on FII outflows,” Madhavankutty said.

At the same time, global investors will be watching the Budget for reassurance on fiscal discipline. Madhavankutty expects the finance minister Nirmala Sitharaman to reaffirm the government’s commitment to fiscal consolidation while retaining flexibility to support growth when she presents the Budget on February 1. A clearly articulated medium-term fiscal roadmap, including the debt-to-GDP trajectory, could be crucial in anchoring investor confidence at a time when the rupee and capital flows are under strain.