India’s Economic Survey is puzzled about a growing disconnect between domestic economic strength and currency performance, noting that the rupee underperformed in 2025, despite robust gross domestic product (GDP) growth, low inflation, a healthy banking system and improved corporate balance sheets.
The Survey argues that traditional macroeconomic indicators are no longer sufficient to ensure currency stability in an increasingly financialised and globally integrated world. Instead, capital flows, global liquidity conditions and external vulnerabilities are playing a larger role in determining exchange-rate outcomes.
A ‘Puzzle’ for Policy-makers
India has been among the fastest-growing major economies, inflation has moderated, banks have repaired balance sheets after a decade-long clean-up, and corporate leverage has declined. The policymakers are 'puzzled' that the rupee lagged several peer currencies in 2025. The Survey suggests that this reflects a shift in how currency markets price risk—placing greater weight on global interest-rate differentials, portfolio flows and perceptions of external balance than on headline growth numbers.
In particular, tighter global financial conditions and relatively high interest rates in advanced economies reduced the appeal of emerging-market assets, including Indian bonds and equities, even as domestic fundamentals remained strong.
Capital Flows Trump Fundamentals
The Survey notes that large and volatile portfolio flows have become a dominant driver of the rupee. Periods of foreign portfolio outflows—triggered by global risk aversion, geopolitical tensions or changes in expectations about US monetary policy—exerted persistent pressure on the currency. We at Moneylife are surprised at policy-makers have suddenly discovered this obvious fact – that capital flows affect the value of currency.
India’s current account position, while manageable, remains structurally sensitive to energy prices and global demand, notes the Survey. Elevated oil import bills and a widening trade deficit during parts of the year added to downward pressure on the rupee.
This combination, the Survey argues, underscores a broader lesson: macroeconomic strength reduces vulnerability, but does not eliminate exposure to global capital cycles.
Real Economy Consequences
The Survey emphasises that rupee weakness is not an abstract market phenomenon but has tangible effects on households, firms and investor sentiment.
A depreciating currency raises the cost of imports, feeding into imported inflation, particularly for energy, fertilisers and electronic goods. It also increases expenses for Indians spending abroad—whether for education, healthcare or travel—and raises the rupee cost of servicing external debt.
For businesses, currency volatility complicates planning and can deter foreign investors who are sensitive to exchange-rate risk, even when growth prospects appear attractive.
Limits of Policy Control
The Survey is careful not to frame the rupee’s performance as a policy failure. Instead, it acknowledges the inherent constraints facing emerging-market central banks in a world of mobile capital and dominant global reserve currencies.
While Reserve Bank of India (RBI) has actively used foreign exchange reserves to smooth volatility, the Survey suggests that no level of intervention can fully offset global forces. Attempting to rigidly defend a currency, it warns, can come at the cost of monetary autonomy or reserve depletion.
The focus, therefore, should be on resilience rather than targeting a specific exchange rate.
A New Policy Framework
The Survey calls for a realistic reassessment of currency expectations. Strong growth, it argues, must be complemented by policies that strengthen external balances, deepen domestic financial markets and attract stable long-term capital flows rather than volatile portfolio money.
For policy-makers, the message is sobering but pragmatic: in today’s global economy, exchange-rate stability cannot be taken for granted. For households and investors, the Survey’s warning is equally clear—currency risk has become a structural feature of India’s growth story, not a temporary aberration.
