The rupee is facing an exogenous shock: let's respond accordingly

Capital outflows can overwhelm the fundamentals of an economy but India’s focus should be on appropriate policy responses

- C. RANGARAJAN & N.R. BHANUMURTHY

Over the last one year, the value of the rupee against the dollar has seen a sharp decline.

Over the last one year, the value of the rupee against the dollar has seen a sharp decline. From 85.48 in May 2025 to presently around 96.82, India’s currency has depreciated by more than 13%; this is the sharpest drop since the 2013 ‘taper tantrum.’ Two sharp downturns have occurred, one after the hike in US tariffs and the second after the outbreak of the US-Israel war on Iran. These are purely exogenous shocks.

For the foreign exchange market, the shock came from large outflows of foreign portfolio investor (FPI) money. Since January 2026, India’s net FPI outflows have been to the tune of $22.2 billion (until 19 May). The previous fiscal year also witnessed a rise in our trade deficit as a proportion of GDP—from 2.6% in 2024-25 to 3.1% in 2025-26. This increase was mostly seen in the second half of 2025-26. The trade deficit was $176.5 billion in the second half, compared to $129.7 billion in the first.