June 2026: What ails the rupee?

In this newsletter we will discuss the depreciation of the rupee in recent times, and what are the root causes of this weakness. To understand the demand and supply of the rupee we look at different components of the balance of payments for India and how they have changed over the last 10 years.

Below we present the depreciation of the rupee as on 30 Jun 2026 for various periods starting from 1 year going up to 20 years.

While over shorter tenures of 1 to 5 years, the depreciation of the rupee has been very severe, over the long term it remains in the 3-4% pa range which is the norm historically. In a previous newsletter we had explained how the rupee is expected to depreciate against the dollar over the long term by 3-4% pa because that is the approximate inflation differential between the two countries. Over shorter periods, the depreciation of the rupee depends on near term current account and capital account flows. We therefore now discuss the different components of India’s balance of payments.

Manufacturing Exports and Imports

Manufacturing exports, which stood at $266bn in FY2016 had grown to $446bn in FY2026, a growth of 5.3%, which is rather low for a country that is trying to move its workforce from agriculture and allied services towards manufacturing and services. Also, manufacturing exports growth over the last 3 years has been very poor, Manufacturing imports on the other hand have grown at 7.0% pa and the net manufacturing exports, which is a negative number, has grown at 10.0% pa with the deficit growing from $130bn in FY2016 to $337bn in FY2026.

Services Exports and Imports

Services exports have recorded healthy growth at 10.6% p.a. for the last 10 years and in many senses, while manufacturing exports have disappointed, services have been a saving grace. Services imports have also grown but at a slower pace than exports and the net export of services have grown at 12% pa over the last 10 years.

Net Transfers, a bulk of which is repatriation of money from the Indian diaspora, has also shown a healthy trend, growing at 8.6% pa and stands at $144bn in FY2026. This is another important source of foreign exchange for India.

Total Current Account

The net result of all the above items on the current account (which includes net manufacturing exports, net services exports, net transfers and net income)  is that we had a $25bn deficit in the current account in FY2026, which though persistent and worrisome from a long-term point of view, has not changed substantially from 10 years ago. So, in a sense, one can say that the current account is not responsible for the current woes of the rupee.

Capital Account

We now turn our attention to the capital account. Historically, India has had a persistent current account deficit which has been covered by robust capital inflows, both on the FDI (Foreign Direct Investment) and the FPI (Foreign Portfolio Investors) front. When we look at the Gross FDI number, it has still grown though at a low pace of 5.1% pa. However, outflows of FDI have grown at a rapid pace of 14.4%, and as a result, a net FDI inflow of $36bn in FY2016 has reduced to $1bn in FY2025 and $7bn in FY2026. This is perhaps the biggest delta in India’s balance of payments in the last 2 years.

FPIs which were a large source of forex inflows into India in the prior decade have turned net sellers in recent years and this is another persistent source of forex outflows.

So, while optically it is the Iran war which has been the reason associated with the rupee depreciation, it appears that the issue stems from the weak net FDI flows and the FII outflows which are the real culprit. High oil prices do of course add to the vulnerability of the rupee.

Alarmed by the large depreciation of the rupee in recent times, the government and the RBI have announced several measures to increase forex inflows into the economy as also to cut outflows. In May 2026, the government raised the import duty on gold from 6% to 15% to discourage domestic buying of gold, which is a major import item for India. The RBI has been selling dollars, both in the spot market and in the forward market. During FY2026 RBI sold a net $53bn (the highest in any single year in RBI’s history) and in April 2026 they net sold $8.9bn.

Further, on Jun 5, 2026, the government decided to exempt foreign investors from tax on interest income and capital gains on Indian government securities with retrospective effect from 1 Apr 2026. The RBI also eased access for foreign investors into Indian government securities by expanding the range of bonds available to them and removing some existing investment restrictions. The RBI also offered a concessional rate for the forex swap for External Commercial Borrowings (ECBs) raised by PSUs. Also, in an important measure, the RBI sweetened the FCNR(B) deposits of Indian banks by offering to bear the entire cost of hedging the currency risk, for deposits raised up to Sep 30, 2026.

The sweetening of the FCNR(B) deposits undertaken by the RBI is a repeat of its playbook from 2013 when India was among the ‘Fragile Five” during the taper tantrum of the Fed. The Fragile Five were India, Brazil, Indonesia, South Africa and Turkey. Today along with India, Turkey’s currency is also showing vulnerability.

The relaxation on the FCNR(B) deposits is likely to lead to large forex inflows into Indian banks, if things were to play out the way they did the last time in 2013. This should boost the deposits growth of banks and thus alleviate the high Loans to Deposits ratio prevailing currently for the banking sector. Moreover, the RBI has exempted the FCNR(B) deposits from the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements for banks. That should help improve the profitability of the banks.

What also bears mentioning is that the last time the RBI announced the relaxations to the FCNRB scheme in 2013 on Sep 4, 2013. From that date the one year and two- year performance of the rupee and the Nifty are given below:

As we can see, 1 year from the date that the RBI opened the FCNRB window in 2013, the Nifty was up 49% and the rupee had appreciated by ~10%. Even two years out, the performance of both the rupee and the Nifty are healthy compared to history. While it is difficult to forecast what will happen this time around, one can take some comfort from history that, from distressed levels, both the Nifty and the rupee have in the past, staged a good recovery over the short to medium term.