ANALYSIS Are global headwinds overshadowing strong domestic fundamentals for rupee?

Indian Rupee

• Indian rupee hits record low despite strong growth and controlled inflation
• Currency pressures arise from trade deficits, capital outflows, and global volatility.
• Economic Survey warns rupee undervalued, persistent weakness may deter investors

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The rupee has slipped to fresh lows in recent months, extending a phase of underperformance despite India posting one of its strongest macroeconomic runs in decades.

Currency pressures have intensified amid volatile global capital flows, heightened geopolitical risks, and a sharp reassessment of risk by global investors, even as growth remains robust and inflation largely contained.

In calendar 2025 and this January, the rupee weakened as foreign portfolio flows turned intermittent and India’s balance of payments came under strain. Persistent merchandise trade deficits, coupled with periods of capital outflows, have weighed on the currency, pushing it to levels that many economists say do not reflect India’s underlying economic strength.

According to Bloomberg data, the domestic currency is down by 2.22 percent, so far in January . So far in the current financial year, the local currency is down by 7.02 percent. On January 30, it was trading at 91.9512 against the US dollar.

“The INR depreciation reflects capital outflows with BoP (balance of payment) turning significantly negative in Q2-Q3FY26. The RBI's ability to defend the currency is limited by a large forward book. The latter limits its ability to sterilise intervention,” said Gaura Sengupta, Economist at IDFC First Bank.

The Economic Survey 2025-26 acknowledges this divergence bluntly, noting that “the Indian rupee underperformed in 2025”, even as growth momentum stayed strong .

The survey explains that India’s dependence on foreign capital to finance its external gap leaves the currency vulnerable when global risk appetite fades. “India runs a trade deficit in goods… When (foreign capital flows) run drier, rupee stability becomes a casualty.”

What makes the recent depreciation striking, the survey argues, is that it comes at a time when most domestic macro indicators are supportive. “Growth is good; the outlook remains favourable; inflation is contained… banks are healthy; liquidity conditions are comfortable,” it says, adding that “the rupee’s valuation does not accurately reflect India’s stellar economic fundamentals”

In a notable phrase, the survey characterises the currency as being undervalued, stating that “the rupee, therefore, is punching below its weight.” It concedes that a weaker rupee offers some near-term insulation, helping exporters and offsetting the impact of higher US tariffs, while noting there is currently “no threat of higher inflation from higher-priced crude oil imports.”

However, the survey also flags the downside. Persistent weakness in the currency, it warns, can dampen investor confidence. “It does cause investors to pause. Investor reluctance to commit to India warrants examination,” it says

The survey strikes a cautious note on currency stability. In an increasingly fragmented global order marked by geopolitical tensions and financial volatility, it warns that disruptions to capital flows could become a recurring risk. “In all three scenarios, India is relatively better off than most other countries… but this does not guarantee insulation,” it notes, adding that capital-flow shocks could have a “consequent impact on the rupee.”