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Yashveer Singh is Adjunct Faculty, National Institute of Bank Management
May 9, 2026 at 7:08 AM IST
A US envoy's statement that Indian firms plan to invest $20.5 billion in their country has been received as a sign of commercial confidence. For India's external balances, however, it may be anything but good news. At a moment when the rupee is already under considerable strain from persistent capital outflows, the prospect of large-scale outbound corporate investment introduces a fresh source of pressure that policymakers can ill afford to ignore.
The rupee's weakness over the past two years reflects several forces. A weaker current account, driven partly by geopolitical disruptions and higher import pressures, has added to the strain. At the same time, foreign institutional investors have continued to pull money out of Indian markets, with net outflows in 2025 and 2026 touching $32.5 billion. Elevated tariffs on Indian exports to the United States, relative to competing economies, have added a further drag. Of these factors, FII behaviour appears to be the single most consequential driver of rupee direction.
The relationship between FII flows and the rupee has also been fairly consistent since COVID. In years when foreign investors were net buyers, such as 2020, 2021, 2023 and 2024, the rupee's fall against the dollar stayed below 3%. In years marked by heavy outflows, including 2022, 2025 and 2026, the depreciation was noticeably sharper at over 5%. The correlation reflects the outsized role that portfolio capital plays in India's balance of payments arithmetic.
Flows and Fragility
On the domestic side, the picture is far more stable. Inflation remains within the RBI's comfort range, growth has held up reasonably well, and the banking sector's credit-to-deposit ratio has stayed above 80%, suggesting demand in the economy remains healthy.
Annual remittance inflows of about $135 billion have also helped cushion pressure on the current account. India's core macroeconomic position, therefore, remains relatively strong despite the pressure on the currency. What remains exposed is the currency's sensitivity to volatile cross-border capital movements, which domestic indicators alone cannot insulate against.
|
Year |
Net FII Flows USD Billion |
|
2020 |
14.04 |
|
2021 |
7.07 |
|
2022 |
-17.94 |
|
2023 |
28.70 |
|
2024 |
19.94 |
|
2025 |
-11.84 |
|
2026 |
-20.62 |
(Source: nsdl.co.in)
The government and the RBI seem to have acknowledged this through policy actions. Several free trade agreements have been signed in recent years, while changes to cross-border merger rules have also encouraged some start-ups to shift their base back to India after earlier moving overseas for easier access to capital and investors. The government has also introduced the RELIEF scheme to support exports through the Gulf region at a time when supply-chain disruptions and geopolitical tensions remain elevated. Recent changes to External Commercial Borrowing framework are part of the same effort to ease pressure on external flows and improve access to overseas funding.
Much, however, will depend on the proposed India-US trade deal. The US is India's largest trading partner and accounts for close to 10% of exports. A deal could support exports and improve inflows, while further delays may continue to weigh on the rupee. There have been signs of progress in recent months, though details remain unclear.
Against this backdrop, the proposed $20.5 billion investment by Indian firms in the US deserves far closer attention. Whether financed through internal accruals or overseas borrowing structures, these investments would still mean additional dollar outflows from India.
Even if FII trends reverse and institutional inflows resume, a significant and sustained programme of outbound corporate investment could neutralise those gains, leaving India in a position where aggregate outflows continue to exert depreciation pressure on the rupee. The headline story of Indian companies expanding in America may be commercially compelling, but from a macro standpoint the timing deserves considerably more sober scrutiny than it has received.
Views are personal
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