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Finnopinions | January 2026
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Rupee Depreciation Over the long term, the rupee’s average depreciation against the US dollar has been about 3% per year. With domestic inflation averaging around 4%, a gradual annual depreciation of roughly 3% helps maintain India’s external competitiveness by offsetting the inflation differential vis-à-vis trading partners. Without this adjustment, Indian goods would become progressively more expensive in global markets, hurting exports and widening the current account deficit. A modest depreciation also supports domestic growth by encouraging import substitution without destabilising inflation. Hence, policymakers generally tolerate gradual rupee depreciation to balance growth, inflation, and external stability rather than defend a rigid exchange rate. However, this year the rupee has depreciated sharply by about 6% against the dollar. Although the dollar index has declined by nearly 10% this year, the rupee has underperformed even against this backdrop. As a result, the rupee’s performance against the British pound and the euro has been even weaker.
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Reasons For Weakness In The Rupee Capital outflows and weak foreign investment
A major driver has been capital outflows from India. Foreign Portfolio Investors (FPIs) have been withdrawing funds from Indian equity and debt markets, increasing demand for dollars. This is largely due to slowing corporate earnings and uncertainty surrounding the US trade deal. Foreign Institutional Investors (FIIs) have sold a record ₹1.6 lakh crore this year. Foreign Direct Investment (FDI) began 2025 strongly, particularly in Global Capability Centres, but even these inflows have turned negative in the past couple of months. Unclaimed Wealth
Widening trade deficit and rising import demand
Unclaimed Wealth India is a large importer of crude oil, electronics, gold, and other commodities. When imports exceed exports, demand for dollars rises,putting pressure on the rupee. Recent data indicates that large trade deficits are contributing to this downward pressure. Nearly 85% of India’s oil is imported, and imports of gold and silver have surged significantly.
Global economic and external environment
High global demand for dollars has weakened many emerging-market currencies, including the rupee. International investors continue to prefer dollar assets over emerging- market currencies. Unclaimed Wealth
Uncertainty around trade deals, especially with the US
Unclaimed Wealth Delays and uncertainty in trade negotiations - particularly with the US - have dented investor confidence. This has reduced foreign inflows and increased risk perceptions, further pressuring the rupee.
Policy stance and market sentiment;
soft central-bank intervention
The Reserve Bank of India (RBI) appears to be following a “soft-touch” intervention approach and has not aggressively defended the rupee. Some analysts believe the depreciation has been partially allowed to conserve foreign-exchange reserves and improve export competitiveness, especially in the context of US tariffs. Unclaimed Wealth
Structural vulnerabilities in the external balance
Unclaimed Wealth Persistent trade deficits, dependence on imported energy and commodities, and volatile capital flows make the rupee vulnerable to global sentiment shifts and external shocks.
Inadequate hedging by importers and ECB borrowers
Many importers and External Commercial Borrowers (ECBs) were insufficiently hedged. The rupee’s rapid fall led to a rush to hedge dollar exposure, further intensifying pressure on the currency. Unclaimed Wealth
WHY DOES THIS HAPPEN EVEN WHEN GDP GROWTH IS HIGH? At first glance, the weakness of the rupee appears contradictory. India recorded 8.2% GDP growth last quarter—the fastest in the world—driven by strong manufacturing, services, and domestic demand. However, GDP growth reflects domestic economic activity, while the rupee is largely influenced by external factors such as trade balances and capital flows. Rapid growth often widens the current account deficit as imports rise, increasing demand for dollars. At the same time, a strong US dollar and higher global interest rates can divert foreign capital away from emerging markets, even when growth is robust. The RBI focuses on managing volatility rather than targeting a strong rupee, as a mildly weaker currency supports export competitiveness. Exchange rates often follow global flows and external dynamics, not just domestic fundamentals. Strong growth does not always translate into a strong currency.
EFFECTS OF RUPEE DEPRECIATION

  • As a net importer, India faces higher costs for crude oil, electronics, gold, fertilisers, and other imports, potentially widening the current account deficit.

  • The S&P Import-dependent companies face higher input costs, squeezing margins or passing inflation on to consumers.

  • Servicing foreign-currency debt becomes more expensive, affecting corporate profitability and government fiscal metrics.

  • Bond Foreign travel and overseas education become costlier, requiring higher savings. Conversely, travel to India becomes cheaper and more attractive for foreigners.

  • Indian exports become more competitive in global markets, benefiting certain sectors.

  • Tourism inflows are likely to increase due to a weaker rupee.

STEPS TAKEN TO STABILISE THE RUPEE OVER THE MEDIUM TERM 1. Major FDI reforms
  • Insurance: FDI limit raised to 100% from 74%.
  • Defence manufacturing: FDI cap increased to 74% under the automatic route.
  • Telecom: 100% FDI permitted under the automatic route to support 5G and digital infrastructure.
  • Space sector: Liberalised rules allow up to 100% FDI in satellite and component manufacturing.
  • Manufacturing: Most sub-sectors allow 100% FDI, supported by PLI schemes.
  • Renewable energy: 100% FDI permitted under the automatic route.
  • Healthcare and pharmaceuticals: Strong inflows, with up to 100% FDI allowed in greenfield pharma projects.
2. Landmark financial-sector investments
Unclaimed Wealth Japan’s Mitsubishi UFJ Financial Group (MUFG) has agreed to acquire a 20% stake in Shriram Finance Ltd for approximately $4.4 billion, the largest FDI in India’s financial services sector. Other notable deals include investments involving Emirates NBD, RBL Bank, Yes Bank, Federal Bank, Manappuram Finance, and IDFC First Bank.
3. Trade developments and export resilience
Despite the absence of a US-India trade deal, India’s merchandise exports to the US rose 22.6% year-on-year in November, narrowing the current account deficit sharply. India is also transitioning toward proactive trade liberalisation through FTAs and CEPAs, with agreements signed with the UK and Oman and negotiations ongoing with the EU and others. Unclaimed Wealth
4. Rupee-rouble trade settlement with Russia
Unclaimed Wealth Around 90–95% of India-Russia trade is now settled in national currencies, reducing dollar dependence. Russian banks and companies are investing surplus rupee balances into Indian markets and government securities.
5. Improving corporate earnings outlook
Corporate earnings appear to be bottoming out after a period of pressure. Improving tax collections, easing input costs, and better operating leverage are early signs of recovery, which could attract foreign investors back into Indian markets. Unclaimed Wealth
6. Inflation management and nominal GDP growth
Unclaimed Wealth While real GDP growth was strong, nominal GDP growth remained modest due to low inflation. The government is comfortable importing some inflation via a weaker rupee to achieve double-digit nominal GDP growth, which is critical for fiscal targets, infrastructure spending, and employment generation.
7. Strong remittance inflows
India remains the world’s largest recipient of remittances. In FY 2024–25, inflows reached a record $135.46 billion, helping offset trade deficits and providing stable foreign-exchange support. A weaker rupee increases the domestic value of remittances. Unclaimed Wealth
8. Tourism promotion
The government is actively promoting high-spend, longer-stay tourism segments such as medical tourism, MICE, eco-tourism, adventure tourism, and cruise tourism. Tourism contributed 6.6% of GDP in 2024 and is targeted to reach 10% of GDP.
CONCLUSION Some experts believe the rupee may not weaken much further. With supportive government measures and a potentially weaker dollar, the rupee could strengthen over the next four to five years. Some analysts even project levels of ₹60–65 per dollar in the long term.
MARKET OUTLOOK
Equity Market Equity Market
In Equity markets remain range-bound with no clear direction. December-quarter corporate results will be closely watched as earnings are expected to improve gradually. Lump-sum investments can continue in hybrid funds, while equity exposure may be built through Systematic Investment Plans (SIPs).
Debt Market Debt Market
While In December 2025, the Indian debt market remained stable. Short- and medium-duration bonds performed better amid easing inflation, adequate liquidity, and expectations that the RBI is nearing the end of its tightening cycle.
Gold Precious Metals
In December 2025, silver surged sharply due to strong industrial demand, tight supply, and a weaker rupee. Gold rose more moderately, supported by central-bank buying and geopolitical risks. Given silver’s parabolic rise, partial profit-booking may be prudent.
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