The Indian rupee has\u00a0not only\u00a0been\u00a0one\u00a0of the biggest underperformers among emerging market currencies this year,\u00a0but it has also been among the\u00a0most\u00a0volatile.\u00a0Its\u00a0volatility has revived a familiar narrative: that India\u2019s currency is hostage to its current account deficit.<\/p>\n
With the country importing the bulk of its crude oil and running a persistent trade gap, it is tempting to attribute every bout of weakness to the same structural flaw.\u00a0While comfortable,\u00a0that explanation does not tell the whole story.<\/p>\n
The capital account angle<\/p>\n
The\u00a0rupee\u2019s\u00a0sharp depreciation\u00a0appears to be\u00a0driven more by\u00a0the capital account. More precisely, it\u00a0seems to reflect\u00a0how the financing of India\u2019s external deficit has quietly become more fragile.\u00a0India\u00a0remains\u00a0a structurally current account-deficit economy. Imports of oil,\u00a0gold\u00a0and electronics consistently exceed exports, ensuring a steady\u00a0dollar\u00a0demand. This produces a large and persistent merchandise trade deficit, which widened to over $300bn in the latest fiscal year.<\/p>\n
Yet,\u00a0this headline number can be misleading if taken in isolation. India is not simply an importer; it is also a major exporter of services.<\/p>\n
That\u00a0clearly\u00a0matters.<\/p>\n
Services have emerged as the main buffer<\/p>\n
India\u2019s services sector has\u00a0emerged\u00a0as the country\u2019s primary external buffer,\u00a0albeit\u00a0risks stemming from AI disruption\u00a0are key to watch. In FY26, services exports generated a surplus of\u00a0roughly $210bn, offsetting about 60-65% of the merchandise deficit.<\/p>\n
When remittances are included, so-called \u201cinvisibles\u201d have\u00a0nearly fully\u00a0offset the goods deficit\u00a0at times, keeping the current account deficit modest by\u00a0emerging-market\u00a0standards. This is why India, despite its large goods deficit, typically runs a current account deficit of only around 1-2% of GDP.\u00a0We think this\u00a0is\u00a0important.\u00a0The rupee\u2019s recent instability\u00a0cannot be\u00a0explained\u00a0we think\u00a0by the current account alone.<\/p>\n
Weakening FDI flows<\/p>\n
However, the broader balance of payments is coming under pressure.\u00a0What has changed instead is the nature of capital inflows.\u00a0For much of the past\u00a0few years, India\u2019s external position\u00a0benefited\u00a0from\u00a0relatively stable\u00a0funding. Foreign direct investment (FDI)\u00a0helped to\u00a0finance\u00a0the residual gap left after services exports.\u00a0As long as\u00a0those flows were strong and predictable, the system functioned smoothly.\u00a0The rupee weakened gradually over time, but without bouts of disorderly volatility.\u00a0This source of inflow has\u00a0weakened. India has become more reliant on\u00a0more volatile\u00a0portfolio flows to finance its external gap.<\/p>\n
Consequently,\u00a0the rupee has\u00a0become more sensitive to marginal shifts in capital\u00a0flows,\u00a0evolving\u00a0from a currency primarily anchored by its current account dynamics. In such a system, volatility is\u00a0increasingly driven\u00a0by the\u00a0behaviour\u00a0of global investors.<\/p>\n
Emphasis on flows<\/p>\n
This helps explain the\u00a0apparent\u00a0paradox\u00a0that has\u00a0emerged\u00a0in\u00a0recent months:\u00a0India has delivered strong economic growth,\u00a0maintained\u00a0relatively stable\u00a0inflation, and kept its current account deficit within manageable bounds. Yet,\u00a0the rupee has weakened sharply.\u00a0This suggests\u00a0currency markets are not pricing\u00a0growth;\u00a0but rather\u00a0flows.<\/p>\n
All that being said, the\u00a0current account still matters\u00a0given how it\u00a0determines\u00a0the scale of\u00a0the financing requirement.\u00a0Even after accounting for the services surplus, India is left with a\u00a0sizeable\u00a0external gap that must be financed annually. When capital inflows are stable, this is manageable. When they are not, the currency bears the burden of adjustment.<\/p>\n
Recent episodes of rupee weakness have been particularly acute because both\u00a0the\u00a0current account\u00a0and\u00a0capital account\u00a0have deteriorated.<\/p>\n
Impact of the Middle East crisis<\/p>\n
The escalation in the Middle East and\u00a0subsequent\u00a0rise in oil prices have only worsened this dynamic\u00a0given\u00a0increased\u00a0dollar demand from Indian importers.\u00a0However, the impact of higher oil\u00a0prices\u00a0goes well beyond trade.\u00a0It\u00a0raises\u00a0inflation risks,\u00a0hurts\u00a0growth expectations, and unsettles\u00a0financial markets. In doing so,\u00a0it\u00a0triggers\u00a0capital outflows, amplifying pressure on the currency. This feedback loop is what\u00a0lies behind\u00a0the\u00a0rupee\u00a0its current volatility.<\/p>\n
A rise in oil prices widens the deficit and weakens the currency. That weakness feeds into investor sentiment, prompting further outflows. Those outflows, in turn, push the rupee lower still.<\/p>\n
RBI\u2019s approach<\/p>\n
The Reserve Bank of India\u00a0(RBI)\u00a0has\u00a0responded\u00a0by focusing on smoothing volatility rather than defending any specific level.\u00a0Nonetheless,\u00a0the RBI has\u00a0tolerated more volatility\u00a0than\u00a0in\u00a0previous years.\u00a0The RBI has also implemented a variety of regulatory measures to avoid depleting FX reserves.\u00a0Intervention has been calibrated\u00a0to prevent disorderly moves while allowing the currency to adjust gradually to underlying pressures. This approach reflects a recognition that while reserves can dampen volatility, they cannot fully offset sustained capital flow pressures.<\/p>\n
This\u00a0does not\u00a0amount\u00a0to a crisis. India\u2019s macroeconomic fundamentals are stronger than those of many of its peers, and its services sector provides a powerful offset to its structural trade imbalance. But the nature of the risk has changed.<\/p>\n
The rupee is no longer simply a currency that drifts lower over time. It is one that moves more abruptly when flows turn.\u00a0For investors and policymakers alike, the lesson\u00a0appears\u00a0straightforward. The rupee\u2019s vulnerability does not lie in the size of its trade deficit, nor even in the trajectory of oil prices. It lies in the reliability of\u00a0the capital\u00a0flows that finance the gap.<\/p>\n
(Mitul Kotecha,\u00a0Head of FX & EM Macro Strategy – Asia-Pacific, Barclays.)<\/p>\n
Views are personal and do not represent the stand of this publication.<\/p>\n","protected":false},"excerpt":{"rendered":"The Indian rupee has\u00a0not only\u00a0been\u00a0one\u00a0of the biggest underperformers among emerging market currencies this year,\u00a0but it has also been…\n","protected":false},"author":2,"featured_media":385485,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[72,113,61,60],"class_list":["post-477187","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-business","tag-economy","tag-ie","tag-ireland"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts\/477187","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/comments?post=477187"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts\/477187\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/media\/385485"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/media?parent=477187"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/categories?post=477187"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/tags?post=477187"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}