MC EXCLUSIVE Rupee weakness is cyclical, not structural; FY27 recovery likely on higher FPI-FDI inflows: S Mahendra Dev

Govt should focus should be on agri-processing, food processing, says S Mahendra Dev

• Rupee's depreciation is cyclical, not structural, says EAC-PM Chair Mahendra Dev
• Rupee expected to appreciate next year with higher FPI, FII, and FDI inflows
• India's digital sector could hit 20% of GDP by FY30, boosted by data centers.

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The weakening of the rupee against the US dollar is a cyclical issue, not a structural one, S Mahendra Dev, Chairman, Prime Minister’s Economic Advisory Council, said on Wednesday. He says the depreciation of the Indian currency is likely to be arrested next financial year, in the wake of higher FPI and FII inflows.

In 2025, the rupee weakened against the dollar by over 5 percent. And today, the Indian currency closed at Rs 91.79/$, down 11 paise from its previous close.

"Weakening rupee has an impact on imports, particularly because we also import some of the commodities for export purposes, so those costs will increase," Mahendra Dev said.

He called the depreciation cyclical, as most of the depreciation occurred last year. "One factor is that there is uncertainty regarding the US-India trade deal. Once that’s settled, the Indian currency will appreciate," said Mahendra Dev.

The EAC-PM Chairman also said that next year, the investments in AI stocks in the US, which are causing FII outflows, will reduce. And on the other hand, FDI inflows in India in the technology sector will increase (in FY27). "These factors will also cause the rupee to appreciate against the US dollar," he added.

In H1 FY26, gross FDI grew by 19.4% to US$ 51.8 billion from $43.4 billion in H1 FY25. And net FDI increased by 127.6% to $7.7 billion from $3.4 billion.

Foreign portfolio investment (FPI), meanwhile, recorded net outflows of $0.7 billion in April 1- December 3, FY26, due to outflows in the equity segment, a statement from the finance ministry had said last month.

"…If you see, in the last five years, the depreciation has not been high. It's only this year that the depreciation has been more than 5 percent," Mahendra Dev noted.

"…it's maybe a question of one year or two years (for the depreciation to be arrested meaningfully)," he added.

One key area for investments in the next financial year is data centres, said the EAC-PM Chairman.

A note by PwC had said that India’s current data centre installed capacity is 1.5 GW, and by 2035, the total capacity is expected to reach to around 14 GW, backed by investment commitments from various Indian and global data centre operators, says PwC.

India’s digital contribution to the nation’s GDP was 11.74% in FY23. It is expected to expand at nearly double the pace of the overall economy, potentially accounting for around 20% of the GDP by FY30, PwC says.