Dipak Kurmi
The Indian rupee’s slide to a fresh lifetime low of ₹91.98 against the US dollar is more than a fleeting market statistic; it is a reflection of deeper structural tensions in India’s external sector. The Economic Survey 2025–26 captures this unease with clarity, noting that the stability of the rupee has become a casualty of an imbalance that India has yet to resolve. While the country enjoys a net surplus in services exports and remittances, this surplus is insufficient to offset the persistent and widening deficit in merchandise trade. As a result, India remains dependent on foreign capital inflows to maintain balance-of-payments stability, a dependence that exposes the currency to volatility whenever global or domestic sentiment shifts.
The immediate trigger for the rupee’s weakness has been the sustained outflow of foreign portfolio investments. In January alone, foreign investors withdrew nearly $4 billion, taking total FPI outflows in 2025 to $11.8 billion. Such withdrawals exert direct pressure on the currency, particularly in an environment where risk appetite is already fragile. The Survey’s assessment is blunt: when foreign capital flows dry up or reverse, the rupee becomes vulnerable. This vulnerability is structural rather than episodic, rooted in the composition of India’s trade and capital account rather than in short-term mismanagement or policy error.
Yet the irony, as the Survey carefully points out, is that the rupee’s valuation does not accurately reflect India’s underlying economic fundamentals. Growth remains robust by global standards, inflation is contained, and the outlook for agriculture is supportive thanks to favourable rainfall patterns. From a macroeconomic perspective, India appears far healthier than many economies whose currencies have performed better. This dissonance has led the Survey to conclude that the rupee is “punching below its weight,” a striking phrase that captures the disconnect between economic performance and currency valuation.
The current global environment adds further complexity to this picture. The imposition of steep 50 per cent tariffs by the United States has raised concerns about India’s export prospects, particularly in sectors reliant on the American market. While the immediate impact on outbound shipments has been limited, exporters have reported a worrying slowdown in fresh orders from the US. If such tariffs persist, they could inflict lasting damage on export competitiveness and earnings. In this context, an undervalued rupee offers a limited cushion, partially offsetting the tariff shock by making Indian goods more price-competitive. The Survey argues that this depreciation does not pose an immediate inflationary threat, particularly given the absence of sharp increases in crude oil prices. Nonetheless, this advantage comes with caveats.
A weaker currency may help exporters at the margin, but it also sends ambiguous signals to investors. The Survey acknowledges that while an undervalued rupee can be strategically useful in the short term, it causes investors to pause. Currency weakness, especially when accompanied by capital outflows, raises questions about confidence, policy predictability, and long-term returns. Investor reluctance to commit to India, the Survey suggests, warrants deeper examination rather than complacent reassurance.
At the heart of the rupee’s fragility lies a long-standing imbalance between services and manufacturing. The Survey makes a broader and more philosophical argument: historically, countries that have failed to build strong manufacturing export bases have struggled to achieve durable currency stability. Strong and stable currencies are typically underpinned by manufacturing excellence, not merely by services prowess. India’s export trajectory since the turn of the millennium illustrates this imbalance starkly. Services exports have consistently outpaced goods exports, a trend that has intensified over the past five years.
Between 2020 and 2025, the compounded annual growth rate of total exports stood at 9.4 per cent, while merchandise exports grew at a more modest 6.4 per cent. Services, particularly information technology-enabled services, have done much of the heavy lifting. They have contributed significantly to growth and have played a stabilising role in the macroeconomic framework. However, as the Survey cautions, services exports are not a substitute for the goods-based export ecosystems that underpin long-term external stability and currency strength.
The limitations of a services-led export model are structural. International experience shows that while services exports generate high value and foreign exchange, they do not exert the same pressure on the state to upgrade institutions, infrastructure, and logistics. Successful service firms can often bypass weak domestic institutions, relocate operations with relative ease, and operate globally without imposing significant fiscal or employment demands on the state. Manufacturing exports, by contrast, impose hard constraints. They require efficient ports, reliable power, skilled labour, integrated supply chains, and predictable regulation. In doing so, they compel governments to strengthen state capacity, invest in public goods, and reform institutions. This distinction, the Survey argues, is why manufacturing matters so deeply for currency stability.
India’s dependence on IT-enabled services as a growth engine has therefore been both a strength and a vulnerability. The sector has delivered global competitiveness despite domestic constraints, but its very success has allowed institutional weaknesses to persist. Manufacturing, with its broader linkages to employment, logistics, and fiscal capacity, offers a more demanding but ultimately more stabilising path. Without a strong manufacturing export base, India’s external account remains structurally exposed, regardless of how well services perform.
It is in this context that the Survey views India’s recent trade agreements as a strategic pivot. Policymakers appear to have recognised that sustainable external stability requires a renewed push into manufacturing. In the current global context, trade agreements are seen as instruments to expand market access for India’s labour-intensive manufactured exports while enabling deeper integration with advanced technological and manufacturing ecosystems, particularly in Europe. The Survey argues that a free trade agreement with Europe holds mutual promise. For Europe, it can support efforts to revitalise parts of its manufacturing base. For India, it can strengthen manufacturing competitiveness, export resilience, and strategic capacity.
However, the Survey is careful to add a crucial caveat. Trade agreements, by themselves, do not guarantee success. Realising their potential requires the ability to produce competitively at scale. This brings the focus back to domestic reforms, investment in infrastructure, skill development, and regulatory efficiency. Without these, preferential market access risks remaining underutilised, offering limited relief to the external account or the currency.
The behaviour of foreign portfolio investors in recent months reflects this broader unease. From April to December 2025, FPIs were net sellers of Indian securities. Several factors converged to dampen sentiment: the relative underperformance of Indian equities compared to other major markets, trade and policy uncertainties, the depreciation of the rupee itself, and a global risk-off environment shaped by elevated US bond yields. Export-oriented sectors such as information technology and healthcare were particularly affected, reflecting concerns about earnings, currency risk, and global demand.
Yet the Survey also highlights a countervailing force that has gained strength in recent years: domestic institutional investors. Mutual funds and insurance companies have played a stabilising role, absorbing a significant portion of the selling pressure from foreign investors. As of September 30, 2025, domestic institutional investors held 18.7 per cent of NSE-listed equities, providing a crucial buffer against volatility. This growing domestic participation reflects deeper financialisation of household savings and a maturing capital market, developments that enhance resilience but do not fully offset the implications of sustained foreign outflows.
The interplay between currency weakness, capital flows, and export structure underscores a central message of the Economic Survey. India’s challenges are not cyclical anomalies but structural features of its growth model. A services-led economy can deliver impressive growth and global integration, but it does not automatically confer currency stability or external resilience. As long as the goods trade deficit remains large and manufacturing exports lag behind potential, the rupee will remain sensitive to shifts in global capital flows and risk sentiment.
The Survey’s assessment does not veer into pessimism. On the contrary, it underscores India’s strong fundamentals and long-term promise. The argument is not that the rupee is fundamentally weak, but that it reflects unresolved contradictions in the economy’s external orientation. An undervalued currency may offer tactical advantages in the face of global protectionism, including high US tariffs, but it is not a substitute for structural strength. Over time, reliance on depreciation as a shock absorber risks eroding investor confidence and constraining strategic autonomy.
Ultimately, the fate of the rupee is inseparable from the trajectory of India’s manufacturing sector. Services will continue to play a vital role, but they cannot carry the burden alone. Durable currency stability requires a diversified export base, competitive manufacturing ecosystems, and a steady inflow of long-term capital rather than volatile portfolio flows. The rupee’s recent slide, as the Economic Survey suggests, is less a verdict on India’s present than a signal about what remains unfinished. Whether the currency regains its footing will depend not on short-term market interventions, but on the success with which India translates growth into structural external strength.
(The writer can be reached at dipakkurmiglpltd@gmail.com)
