Why growth isn’t saving the rupee

Last year was not a good one for the Indian rupee.

- RAJESWARI SENGUPTA

It weakened steadily, even against a soft US dollar, ending 2025 as Asia’s worst-performing currency. Some argue that the rupee’s slide will be a blessing in disguise, giving long-struggling exporters a much-needed boost. Perhaps it will. But before taking comfort, it is worth asking a more fundamental question: Why is the rupee falling in the first place?The puzzle is sharpened by the apparent strength of the Indian economy. Growth remains brisk, and inflation has fallen to multi-decade lows. It is true that exports have taken a hit from higher US tariffs, with merchandise shipments growing by less than 1 per cent year-on-year between August and December 2025. Yet gross domestic product (GDP) is still projected to expand by 6.5-7 per cent in 2026-27, keeping India firmly in place as the world’s fastest-growing major economy.

Ordinarily, such performance would attract foreign capital, as investors chase returns, lifting the currency in the process. That was the pattern during the boom of 2004-08, when equity inflows averaged a little over 2 per cent of GDP and the rupee appreciated by around 2.5-3 per cent a year. This time, the script has flipped. Despite strong growth, the rupee has fallen by more than 5 per cent so far in 2025-26.