India needs to tackle the structural factors weighing on the rupee rather than rely on currency intervention and tighter monetary policy, ANZ Research said in a report today. The country must attract more foreign investment, reduce the import intensity of economic growth, and strengthen domestic manufacturing capacity and energy security, it said.

While foreign exchange intervention and monetary tightening can contain short-term volatility, neither can permanently offset shifts in global capital flows or address underlying external imbalances, ANZ said.

A changing external constraint
India’s currency pressures reflect tighter global financial conditions, persistent portfolio outflows, and an uneven improvement in the current account. ANZ estimates that the current account deficit India can comfortably finance has declined from around 2.5% of GDP in 2023 to 0.6%, based on the three-year rolling trend in the net financial account. This suggests that even a projected FY27 current account deficit of 1–1.5% of GDP could prove difficult to finance.

The shift reflects higher returns in developed markets and stronger competition for global savings. With five-year US government bond yields around 5%, up from about 1% five years earlier, foreign investors have less incentive to accept emerging-market currency and asset risks. India’s external vulnerability is therefore increasingly determined by the availability and cost of capital, rather than the current account deficit alone.

Import dependence remains a structural weakness
Although India’s current account deficit has narrowed, the improvement masks a widening imbalance in core goods trade. The report estimates that India’s import-to-GDP ratio has risen from around 20% to 25% over the past five or six years, suggesting economic growth is becoming more import-intensive.

On a four-quarter rolling basis, 72% of the deterioration in the goods balance through the April-June quarter of 2026, relative to its 10-year average, came from the wider core goods deficit. Oil and gold accounted for most of the remainder. A growing services surplus and stronger income and transfer inflows have contained the headline current account deficit, but have not eliminated the underlying dependence on imported goods.

Expanding domestic production capacity and improving energy security would help moderate growth-driven foreign currency demand. These measures would address a more durable source of external pressure than attempts to manage the exchange rate through intervention alone.

Portfolio flows amplify currency pressure
The report also highlights the growing influence of financial-account flows on the rupee. Persistent equity outflows and shifting global risk appetite have strengthened depreciation expectations, influencing how importers and exporters manage currency exposures.

Importers tend to accelerate foreign currency purchases and increase hedge ratios when they expect the rupee to weaken. Exporters, meanwhile, may delay converting receipts or selling foreign currency forward. This creates a mismatch between gross foreign currency demand and supply, even when the net current account deficit remains relatively small.

Restoring portfolio equity inflows therefore requires improving India’s relative attractiveness to foreign capital. Taxation, regulation and the range of investible opportunities are primarily fiscal and structural issues; monetary policy alone cannot resolve them.

A more adaptive policy response
The Reserve Bank of India should allow the exchange rate to absorb more persistent external shocks rather than expend reserves defending a narrow range. ANZ advocates unpredictable intervention to discourage one-sided market positions, alongside firm monetary-policy signalling to anchor expectations and raise the cost of persistent speculative positions against the rupee.

Regulatory restrictions that increase the perceived risks of investing in Indian assets could, however, prove counterproductive if they deter capital inflows.

India’s currency challenge is no longer adequately captured by the headline current account deficit. Sustainable stability requires credible monetary management, stronger domestic production, lower import intensity, and a more attractive investment environment. Intervention can buy time; structural reform is needed to make that time count.