From the Opinions Editor: The rupee’s problems run deep. RBI’s actions cannot stem its slide

In most of these episodes, the immediate triggers have been largely external to the country. Some of them have centred around financial market stress – the global financial crisis of 2008 and the taper tantrum of 2013 – others around dislocations in energy markets – the price shocks following the Russia-Ukraine conflict and the recent war in West Asia.

Alongside these external shocks, domestic factors such high inflation and a persistent current account deficit are some of the reasons put forth to explain the currency’s depreciating bias. But, now, other factors appear to be weighing more heavily on the almost unidirectional movement of the rupee.

Consider the currency’s movements last year.

Between January to December 2025, the US dollar had weakened considerably. The dollar index – which measures the greenback’s strength against a basket of six currencies – fell from 108.09 to 98.25. But, rather than strengthening, the rupee weakened from 85.70 to 89.91 against the dollar.

The rupee was then in a minority. Currencies of both emerging and developed economies — for instance, the Thai baht, the Chinese yuan, the Korean won, the Taiwanese dollar, the Brazilian real, the Mexican peso, the euro and the pound — had strengthened against the dollar. The other exceptions being the Indonesian rupiah and the Vietnamese dong.

Strangely, during this period, India was said to be in a “Goldilocks phase” — growth was healthy, and inflation and the current account deficit were considerably lower when compared to historical trends. These macroeconomic indicators, as others have also argued, didn’t warrant the currency to fall by around 5 per cent at a time when the dollar was itself weakening. Something else was at play.

The rupee’s fall can be traced primarily to capital outflows. This was due to many reasons. One, the deterioration in trade relations between India and the US had dampened sentiment. Two, the absence of a domestic AI play at a time when global investors have been flocking to such tech companies the world over. And three, domestic capital seeking sunnier shores. It was these country specific issues, which raise questions over the economy’s growth prospects, that led to capital outflows, exerting pressure on the currency. Thus, the problem of capital flows and the pressure on the rupee predate the war in West Asia.

Now, fast forward to the present. With investors turning risk averse following the conflict in West Asia, there has been a flight towards safety — the dollar index rose from 98.25 at the beginning of January this year to 100.59 at the end of March. The rupee continued to weaken during this period, falling from 89.97 to 94.65. It has taken exceptional steps by the central bank to stem its downward slide.

In previous episodes when the rupee has come under pressure, such as the taper tantrum of 2013, after a steep fall, the currency did tend to stabilise. So the question now is whether history will repeat itself? Will the depreciation pressures on the currency ease if Iran and the US arrive at an agreement?

Any such agreement will have a cooling effect on energy prices helping ease pressures on the current account. But the question over capital flows is likely to remain. If capital was exiting the country prior to the conflict due to a loss of confidence over the economy’s growth prospects, then is it prudent to expect flows to reverse even if energy market dislocations ease and trade to the West Asia region normalises?

There may well be moments of relief. Interventions by the central bank — such as in the offshore NDF market — may also provide some respite. But these are likely to be short lived. The currency’s problems seem to run deeper. A loss of investor confidence could well continue to exert pressure on the currency, in which case, it is unlikely that any steps taken by the central bank will help stem the slide. Perhaps it would be more prudent to examine the reasons for capital outflows in an economy that is growing at more than 7 per cent.

Till next time,

Ishan