Why This Rupee Episode Is Different

Currency depreciation is never just about the exchange rate. It is a test of the balance of payments, macroeconomic credibility, policy response, and investor expectations. Since October 2025, the rupee has come under pressure. But the right way to read this episode is not to view it in isolation. India has lived through far sharper currency episodes: the East Asian crisis in 1997, the global financial crisis in 2008, the repeated current-account stress of 2011–13, the oil-driven episode of 2018, and the dollar surge after the Russia-Ukraine conflict in 2022.

The current episode is materially different. Since 1997, India has seen eight episodes of significant rupee depreciation over short spans. The decline has ranged from 8.9% in the current cycle to 28% in 2013. The average episode has lasted six to seven months. By that yardstick, the present cycle is the mildest and is also among the least volatile.

That does not make it irrelevant as persistent depreciation can still generate a feedback loop. Markets extrapolate with importers front-loading demand and exporters delaying conversion. Foreign investors see local-currency returns through a dollar lens. At that point, a flow problem can become an expectations problem.

The policy task, therefore, is not to defend an arbitrary level of the currency but instead to prevent one-way expectations from taking root, while ensuring that the balance of payments is credibly financed. On that count, the recent measures by the government and the RBI should stem the tide of depreciation by bringing in an estimated $75 billion–$80 billion of inflows to bridge the BoP gap this year.

History’s First Lesson: External Events Trigger, Domestic Policy Decides
The common thread across India’s depreciation cycles is that the catalyst is usually external. But the magnitude of the adjustment depends on domestic fundamentals and the policy response.

In 1997, the catalyst was the East Asian crisis. Many East Asian currencies were pegged to the dollar. When Thailand removed its peg in July 1997, the pressure spread to the Philippines, Malaysia and Indonesia. Dollar borrowing became difficult to service as local currencies collapsed. The Indonesian rupiah moved from around 2,450 per dollar in July 1997 to beyond 10,000 by March 1998, and later weakened even further.

India was not immune, and the rupee fell 15.9% between November 1997 and July 1998. But it was far more resilient than many Asian peers because it had already moved to a floating exchange-rate framework in the early 1990s. 
The lesson remains relevant: a currency can be managed for volatility, but it should not be trapped by an unsustainable peg. Flexibility is not weakness and instead is a shock absorber.

The 2008 Lesson: Stimulus Buys Time, Reforms Buy Durability
The next major episode came in 2008. As the US banking crisis intensified, portfolio flows moved back to the US. The dollar index gained around 17% between August 2008 and March 2009, while the rupee lost 23% against the dollar. The Korean won fell even more sharply, and the Indonesian rupiah also came under pressure.

India’s response was a mix of monetary and fiscal stimulus, with the RBI injecting liquidity and cutting policy rates and the Government expanding fiscal spending and raising MSPs to protect the economy from the compression in global demand. This helped cushion growth in the short run. But it also contributed to a later rise in inflation and a widening current-account deficit.

The lesson from 2008 is not that the stimulus is wrong, but that a stimulus without reforms can create external imbalances. Demand support must be accompanied by reforms that expand supply, improve productivity, and increase the economy’s absorptive capacity. Otherwise, the import bill rises, inflation follows, and the currency eventually adjusts.

The 2011–13 Lesson: The Current Account Cannot Be Ignored
The most difficult period for the rupee came between 2011 and 2013. The currency saw repeated bouts of pressure. It fell by 20.9% between August 2011 and January 2012, by 16.1% between February and June 2012, and by 28% between May and August 2013.

This was not just about the dollar. It was about India’s current-account deficit. Oil prices rose from $70 per barrel in 2009-2010 to $87 in 2010-2011 and remained above $100 for three consecutive years between 2011-2012 and 2013-2014. Gold imports added to the pressure. India’s CAD rose from 2.3% of GDP in 2008-2009 to an unsustainable 4.8% of GDP in 2012-2013.

That episode forced a policy reset, with India moving towards a more durable macro framework, including flexible inflation targeting and a series of external-sector measures. Since then, the rupee has continued to depreciate over time, but the pace has been more measured. A lower inflation differential with trading partners has reduced the need for sharp nominal adjustments.

The 2011–13 lesson is straightforward: a current-account deficit can be financed for some time, but it cannot be wished away. If oil and gold drive imports higher, and exports or stable capital inflows do not keep pace, the currency becomes the adjustment variable.

Oil, Dollar Strength, And the Capital Account
The 2018 depreciation was again oil-led. The rupee fell 17.4% between January and October 2018. Once oil prices softened, depreciation pressure eased.

In 2022, oil prices again rose after the Russia-Ukraine conflict. India’s trade deficit expanded from 6% of GDP in 2021-22 to 8.2% of GDP in 2022-23. Inflation pressures rose as well. But the rupee was more stable than in many previous episodes because capital inflows were stronger.

Sometimes the pressure comes from the current account, through oil, gold and imports. Sometimes it comes from the capital account, through portfolio outflows and shifts in global allocation. The current episode has elements of both, but the defining feature is capital-account pressure led by equity outflows.

Why The Current Cycle Is Different
The current depreciation cycle has taken place after two years of BoP strain. Equity outflows have been large. Since October 2024, equity outflows have been estimated at $61 billion. Yet debt flows have remained stable, with cumulative FPI debt stock at around $95 billion.

Equity investors are reallocating globally. Debt investors are rewarding macro management.

India’s fiscal position has remained conservative, with the fiscal deficit at 4.4% in 2025-26. Inflation pressures have been more benign than in earlier stress episodes. Corporate leverage is lower, the banking system is better capitalised, and macro buffers are stronger than in previous cycles. These factors explain why volatility has been much lower this time. In both 2022 and 2026, rupee volatility measured by the coefficient of variation has been around half of what was seen in 2008.

But low volatility should not lead to complacency as markets move on expectations. If depreciation becomes persistent, it can alter behaviour. The objective of policy must be to change the narrative before depreciation becomes self-reinforcing.

Equity Is Global, Debt Is Policy-Sensitive
India’s equity outflows are not occurring in a vacuum, and global equity flows have been moving to the US, Japan and a few other markets. In the twelve months to March 2026, portfolio inflows into the US were $1.6 trillion, with close to half coming through equities. Equity inflows into the US rose to $760 billion from $415 billion a year earlier, largely reflecting the AI theme. Japan has also seen strong inflows.

This has affected emerging markets broadly. India’s weight in the MSCI EM index has fallen to around 11% from 21% in September 2024. FPIs have sold in emerging markets, including Korea, as capital has chased US technology and large issuance themes.

There is little domestic policy can do to reverse a global equity allocation cycle overnight, but debt flows are different. They respond more directly to macro credibility, index inclusion, currency expectations, taxation, and the shape of the yield curve.

India’s FPI debt stock is lower than its equity stock, but it has been far more stable. That stability reflects prudent fiscal and monetary management. It also reflects the importance of global bond index inclusion. The government and the RBI are right to focus on this channel.

The $75 billion Bridge
The immediate policy response is built around stable inflows, and several channels matter.

First, the withdrawal of capital gains and withholding tax on government securities should support possible debt inflows of around $25 billion through index inclusion. The expansion of Fully Accessible Route securities, including 15-year, 30-year and 40-year tenor securities, should further deepen the investible pool.

Second, ECB issuance by PSUs can bring in additional inflows. Corporate bond flows should also improve as yields head lower and FPIs position ahead of the move.

Third, currency stability itself can become a trigger for equity inflows. Indian equities have delivered around (-)1% in local-currency terms since January 2025, but around (-) 13% in dollar terms because of rupee depreciation. If the currency stabilises, that return differential narrows. For global investors, the same equity market begins to look different once the currency drag is reduced.

Fourth, FCNR(B) deposits can be an important stabilising channel. In 2013, RBI measures generated $26.6 billion of FCNR inflows. The starting point today is much larger, and higher income levels among non-resident Indians should support a stronger response. FCNR deposit rates offered by large banks in the 5.5–6% range should also help mobilisation.

Fifth, NRI and OCI portfolio ownership limits allow participation up to 10% in individual capacity and up to 24% in aggregate through portfolio investment schemes. This is another useful channel for broadening the investor base.

Together, these measures should bring in the much-needed $75 billion-$80 billion of inflows. They should also turn the BoP into surplus after two years of deficit. In the near term, dollar inflows are positive for liquidity and credit growth in the second half. A stable currency should also allow the policy debate to return to the growth-inflation mix, which could see 50–75 bps of hike in the policy repo rate in 2026-27.

The Structural Test Is FDI
Portfolio and debt flows can bridge the gap. They cannot be the entire answer. For a durable external position, net FDI flows must move higher.

Gross FDI inflows into India improved to $94.5 billion in 2025-2026, or 2.4% of GDP, from $81 billion in 203-25. This is encouraging, and only marginally below the 2021-22 peak of 2.8% of GDP. Fresh inflows have improved, while reinvested capital has remained stable at around 0.8% of GDP.

The concern is on the outflow side. Gross FDI outflows rose to $86.9 billion in 2025-26. Repatriation was $53.6 billion, and outward FDI by Indian companies was $33.3 billion. Net FDI was only $7.6 billion, or 0.2% of GDP.

Some of this reflects India’s liquid capital markets and IPO activity. In the short run, repatriation can put pressure on the BoP. In the long run, liquid markets are a strength. They give foreign investors confidence that exits are possible, and liquid markets tend to enjoy a premium.

But the direction is clear: India needs higher net FDI, not just higher gross inflows.

The FDI challenge, however, is global, not just Indian, as net FDI flows are shrinking worldwide. Higher interest rates, geopolitics, industrial policy and the AI boom are reshaping capital allocation.

FDI started to taper after the US-China trade war, and it shifted again after the US announced the Inflation Reduction Act and CHIPS Act in 2022. The Russia-Ukraine conflict disrupted the geopolitical order further. Across economies, industrial subsidies have risen sharply, from around $680 billion in 2019 to $1.1 trillion now.

Every major economy is trying to localise supply chains. China is focused on AI, infrastructure and advanced semiconductors through its 15th Five-Year Plan. The European Union is using a clean industrial policy to decarbonise heavy industries. The US is reshoring advanced wafer foundries and quantum technologies through the CHIPS Act. India’s PLI schemes span 14 key sectors, with visible success in electronics, EVs and related areas.

This is the world India is competing in, and FDI will not flow solely because India is large, but because it offers scale, policy stability, competitive costs, export access, infrastructure, and ease of doing business.

India Must Compete For Supply Chains, Not Just Capital
Most Asian economies that have seen shrinking net FDI also run current-account surpluses and benefit from manufacturing exports, especially to the US. India is different, and it still needs capital flows to finance the current-account gap unless it generates a sustained surplus.

That means the FDI strategy has to be tightly linked to the trade strategy. India must integrate with supply chains in Europe, Japan and the US, while also remaining competitive with China. FTAs, bilateral agreements, PLI schemes, data-centre incentives, and ease-of-doing-business reforms are all part of the same policy architecture.

The goal should not be FDI for domestic demand alone. It should be FDI that brings technology transfer, builds export capacity, and embeds India in global value chains.

Data centres are an example of the  new opportunity. Global FDI is moving towards advanced economies and AI-linked infrastructure. Hyperscalers are investing heavily across the artificial intelligence value chain. In India, data-centre investments by three hyperscalers are estimated at around $70 billion. Indian companies are also investing in this segment. The policy question is how to convert this capex into a broader ecosystem of power, chips, cloud, software, AI services and high-value employment.

Valuation Helps, But It Is Not Enough
The rupee is now more attractive compared with historical levels. It is also comparable with the Chinese yuan in valuation terms. That is positive for exports.

But currency valuation alone does not guarantee export growth, and the relationship between REER and goods exports is not very strong. Export performance depends on capacity, logistics, market access, product sophistication, standards compliance, energy costs and the ability to plug into supply chains.

A competitive currency can help, but it cannot substitute for competitiveness.

The near-term compact is clear. Use stable debt flows, FCNR(B) deposits, ECBs, corporate bond flows and index inclusion to finance the BoP. Reduce currency volatility and prevent depreciation expectations from becoming self-fulfilling. Keep fiscal and inflation credibility intact, because debt investors reward macro discipline.

The medium-term compact is equally clear: raise net FDI and make manufacturing export-oriented. Use FTAs and bilateral agreements to improve market access. Keep improving compliance, taxation, logistics, power availability and execution certainty. Build around sectors where global supply chains are being reconfigured: electronics, EVs, semiconductors, data centres, AI infrastructure and services.

The long-term compact is the most important. Currency stability must come from productivity-driven growth, not only from capital-flow management. The lesson from every depreciation episode is that reforms are more durable than stimulus, and credibility is more powerful than intervention.

Every major rupee depreciation since 1997 has left behind a policy lesson. The lesson from this episode may be that balance-of-payments stress in the modern era is increasingly shaped by global capital allocation rather than domestic macroeconomic excess. As technology, industrial policy and geopolitics redirect capital flows across the world, countries will need to compete not merely for portfolio flows but for investment, production and supply-chain integration.

The rupee, therefore, is best viewed as a symptom rather than the story itself. This presents an opportunity to deepen integration with the global economy while preserving macroeconomic stability. This would build resilience and hence the current depreciation will be remembered not as a crisis, but as another adjustment in a longer process of economic transformation.

Also read the column by Prof Jayant Varma, “India’s Balance of Payments: Time for a New Paradigm”