By Sahasranshu Dash & Dillip Kumar Muduli
The rupee’s recent depreciation from around 83-84 per dollar in late 2024 to nearly 96 in June 2026 has reignited concerns about India’s external vulnerability. Despite RBI intervention and reserve sales exceeding $30bn since February, the currency remains under pressure.
Much of the debate has focused on RBI intervention and attracting foreign capital. Yet India’s rupee problem is not fundamentally a currency problem. It reflects deeper issues involving trade competitiveness, export performance, capital flows and productivity growth.
The rupee’s weakness is often attributed to India’s merchandise trade deficit, but the more consequential issue is the current account and the nature of the capital inflows financing it. Combined merchandise and services exports have recently exceeded $80bn per month, yet India’s share of global merchandise exports remains around 2%, while the merchandise trade deficit frequently exceeds $250bn on an annualised basis.
The imbalance remains manageable because India’s globally competitive services sector generates a surplus that increasingly finances a structurally weaker merchandise-trade position. Nor is the problem simply oil. A growing share of imports consists of electronics, machinery, semiconductors, intermediate goods and capital equipment. These imports often support domestic investment and economic growth. A rapidly expanding economy can therefore record strong GDP growth, rising imports and a weakening currency simultaneously if external financing requirements increase faster than foreign-exchange earnings.
A weaker currency is often assumed to boost exports automatically. However, evidence suggests otherwise.
In a study covering 45 Indian industries between 1990 and 2013, Gozgor, Lau and Bilgin found that supply-side constraints significantly weaken the export benefits of depreciation. Infrastructure bottlenecks, logistics costs and production constraints often prevent firms from expanding exports even when price competitiveness improves. India’s logistics costs remain around 8% of GDP, above those of many advanced manufacturing economies. India’s integration into global value chains has also lagged behind export-oriented economies such as Vietnam, Thailand and Malaysia.
Vietnam offers a revealing comparison. Through export-oriented manufacturing and deeper integration into global value chains, it has become one of the world’s most export-intensive economies despite its far smaller size. For India, greater participation in global value chains is not merely a trade objective but a driver of exports, investment and productivity growth.
Trade is only one side of the equation. The composition of capital inflows matters equally.
Foreign direct investment is generally associated with productive assets, technology transfer and long-term commitments. Portfolio investment, by contrast, is highly sensitive to changes in global interest rates, risk sentiment and exchange-rate expectations. Net FDI inflows have generally remained below 2% of GDP in recent years, while portfolio flows have become an increasingly important marginal source of external financing.
Ajay Shah and Ila Patnaik argued that India’s post-1991 framework faced a persistent tension between an increasingly open capital account, a partially managed exchange rate and monetary-policy autonomy. Current-account deficits were manageable when financed by stable long-term capital but became more vulnerable when dependent on portfolio inflows. India continues to navigate this version of the Mundell-Fleming trilemma today.
The events of 2026 illustrate the point. By mid-May, foreign portfolio investors had withdrawn more than Rs 2.2 lakh crore from Indian equities, exceeding total outflows for all of 2025, amid higher US interest rates, a stronger dollar and geopolitical uncertainty. Yet the selling may also reflect a deeper question: does India’s structural economic performance justify the premium at which its financial assets trade? Indian equities continue to command higher earnings multiples than most major Asian markets, but productivity growth, manufacturing expansion and export performance have improved only gradually. Manufacturing remains stuck at roughly 15-17% of GDP.
India has a flexible exchange rate, substantial foreign-exchange reserves, relatively low foreign-currency borrowing and a more resilient financial system. Yet investors ultimately judge currencies by underlying productivity, export performance and external sustainability rather than growth narratives alone.
The same principle applies to India’s ambition to internationalise the rupee. International currencies emerge not because governments declare them into existence, but because investors, businesses and central banks have confidence in the issuing economy. Deep financial markets, strong exports, predictable institutions and sustained productivity growth matter far more than official initiatives.
The central question is not whether the rupee trades at 90, 95 or 100 to the dollar. It is whether India is becoming more productive, competitive and capable of generating foreign-exchange earnings through exports and investment. India’s rupee problem is ultimately a competitiveness problem.
Sahasranshu Dash is a research associate at the International Centre for Applied Ethics and Public Affairs at Sheffield, the UK. Dillip Kumar Muduli is a lecturer in economics at SVM Autonomous College, Jagatsinghpur, Odisha.
