Rupee Depreciation: How Much More?

The sharp fall in the rupee over the last couple of months and its somewhat uncertain future, should force us to ask some difficult questions. At the outset, one must recognise that this is not textbook capital flight. Such episodes are usually concentrated over a short span of time, driven by shocks like an unexpected rise in US interest rates, and they tend to affect economies that are perceived as similar — emerging markets, or the European PIIGS, which were saddled with large debt during the Great Financial Crisis that began in 2008.  In such periods, the dollar, traditionally a safe haven, typically rises. None of this happened. The dollar index lost ground in 2025, while the rupee vastly underperformed its Asian peers. The Thai baht and the Malaysian ringgit, for instance, were up 8.2% and 10.5% against the dollar in 2025, while the rupee fell 5%.

This uniqueness of India’s problem, where the slow burn of capital flight through 2025 added up to a hefty $18 billion, warrants an explanation beyond the oft-repeated claims of “stretched valuations” and crippling US tariffs. The punitive 50% tariffs were imposed only at the end of August. While they might have opened up the wound a little more, the haemorrhage began much earlier.

It is also important that foreign investor apathy towards India emerged in a year that policymakers described as a Goldilocks year, with inflation moderating and growth surprising sharply to the upside. Why this asymmetry between the global perception of India and domestic cheerfulness about the state of the economy?

One clue lies in the very nature of “Goldilocks” itself, a macroeconomic curiosity that often baffles investors. A combination of strong growth and weak inflation pressures implies that while aggregate demand appears robust, firms have little pricing power. This shows up as strong real GDP growth but sluggish nominal GDP growth. Headline official growth numbers tell investors and businesses a story of robust demand, but they don’t see this translating into pricing power. The frequently cited phrase “lack of visibility of future earnings”, often used to explain why rapid GDP growth does not lead to a commensurate rise in financial markets, reflects the difficulty of squaring this circle.

This brings us to the lingering question of whether the GDP numbers match what forecasters observe on the ground. The last few GDP releases have been “gotcha” moments for both private and official forecasters, including the Reserve Bank of India. The fact that most forecasts have fallen well short of actual prints calls for introspection and humility among forecasters. That said, it also raises legitimate questions about data credibility. 

Growth rates in the range of 7.4% to 8.2%, spectacular by global standards, should be visible either in the solidity of their drivers or in their sectoral impact, not just to the National Statistics Office but to observers more broadly. Such acceleration typically occurs when there is a surge in investment demand or exports. Neither has happened.

It is possible that persistent errors exist either in data collection or in the computation of macroeconomic aggregates. The use of an inappropriate deflator has been flagged in the past. The outdated GDP series, with a base year of 2011-12, raises concerns about its ability to reflect the economy 15 years later. A new series with 2022-23 as the base is on its way. Until then, it is important that policymakers, particularly in the finance ministry and the RBI, are guided by careful assessment of the data and not solely by official headline statistics.

Some of the reasons for the rupee’s hammering can be traced to the unhealthy obsession of the previous regime under Governor Shaktikanta Das with a rock-steady exchange rate. The regime justified intervention in the foreign exchange market not as an attempt to maintain competitiveness, but as necessary reserve accumulation, something all emerging markets were entitled to pursue. This strategy did pay off to an extent. Reserves grew and appeared adequate. The question, however, is whether they were sufficient to retain control over the rupee when pressure mounted.

The IMF uses an Adequacy of Reserve, or ARA, metric that incorporates potential risks, sources of shocks, and underlying vulnerabilities. For emerging markets, a reserves-to-ARA ratio of 100 to 150 is considered safe. Despite a steady buildup since the last quarter of 2022, India’s ratio stood at 114 in 2024, at the lower end of the band, and fell to 111 in October 2025. “Adequacy” does not imply that a central bank can sustain a crawling peg of the kind preferred under Governor Das’s regime. The near-continuous depreciation since April may therefore, in part, reflect investor pushback against an exchange-rate regime seen as difficult to sustain. Worse, current reserves may be sufficient only to smooth sharp movements, not to defend any particular level of the rupee for long.

Finally, capital flows today are increasingly driven by newer factors – geopolitics (often a euphemism for ties with the US), technological innovation and AI, and integration into supply chains to innovation leaders such as the US or China. India does not tick any of these boxes. Unless a trade deal with the US materialises or global investors pivot away from ‘innovation plays’, the depreciation of the rupee may continue. This does not represent a dramatic shift in the RBI’s currency strategy, but rather a recognition of ground realities relative to the country’s reserve position.