The Economic Survey attributes the rupee’s sharp depreciation to geopolitical volatility and weak foreign capital inflows.
Despite hitting a record low, the Survey says the rupee is “punching below its weight,” citing strong growth, stable inflation, healthy banks, and robust credit conditions.
It warns that global risks could disrupt capital flows and further pressure the rupee.
The steeper-than-expected depreciation of the rupee has been driven by ongoing geopolitical volatility, the Economic Survey said on Thursday. The rupee has emerged as the worst-performing currency among its Asian peers, weakening nearly 6% against the US dollar in 2025. Against this backdrop, the Survey described the rupee as a “victim of geopolitics and the strategic power gap.”
Unlike several Asian economies such as South Korea, India runs a persistent trade deficit in goods, with its import bill often ballooning. The country relies on foreign capital inflows to meet dollar demand and maintain a healthy balance of payments. However, 2025 has seen muted inflows amid an exodus of foreign investors from Indian markets, leaving the rupee vulnerable.
1 January 2026
Get the latest issue of Outlook Business
The domestic currency slipped to a record low on Thursday, breaching the psychologically crucial level of ₹92 per dollar. However, the Economic Survey noted that the rupee’s valuation does not accurately reflect India’s macroeconomic fundamentals.
“Growth is good; the outlook remains favourable; inflation is contained; rainfall and agricultural prospects are supportive; external liabilities are low; banks are healthy; liquidity conditions are comfortable; credit growth is respectable; corporate balance sheets are strong; and the overall flow of funds to the commercial sector is robust,” the report said. “The rupee, therefore, is punching below its weight.”
The Survey also underlined that the depreciation of the domestic currency does not pose a significant inflation risk, given subdued global crude oil prices. “It does not hurt to have an undervalued rupee in these times, as it offsets, to some extent, the impact of higher American tariffs on Indian goods,” it said.
However, it cautioned that the fall in the rupee has prompted investors to reassess their exposure, leading to reluctance in committing capital to India—an issue that warrants closer examination.
The Economic Survey outlined three possible scenarios for the global landscape. The first is a continuation of current conditions through 2025. The second involves an escalation of existing geopolitical tensions and explicit economic coercion shaping trade and policy decisions. The third—and least likely—scenario is a systemic shock worse than the 2008 global financial crisis, triggered by a correction in a highly leveraged AI investment boom. Such a correction, the Survey warned, could tighten financial conditions and spill over into broader capital markets.
“Across all three scenarios, a common risk for India is disruption to capital flows and the consequent impact on the rupee,” the report said, even as domestic fundamentals remain strong. It urged policies that can attract sustained investor interest and generate sufficient foreign currency earnings to cover India’s import bill.
(This is a developing story.)
