Meanwhile, the rupee hit a fresh all-time low of ₹92 against the dollar in intraday trade Thursday. This follows a period of extreme volatility where the currency has repeatedly tested historic lows throughout January due to sustained foreign capital outflows and a prolonged stalemate over a U.S. trade deal that has sapped investor confidence. Heightened geopolitical tensions across global markets have only added to the strain, pushing the currency deeper into uncharted territory.
The survey noted that India’s dependence on foreign capital inflows to finance its current account gap makes the rupee vulnerable during periods of global tightening. While India runs a merchandise trade deficit, its surplus in services exports and remittances is insufficient to fully offset the gap, making capital inflows critical for balance of payments stability.
At the same time, the Economic Survey said the rupee’s valuation “does not fully reflect India’s strong economic fundamentals”. “The rupee, therefore, is punching below its weight. Of course, 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, and there is no threat of higher inflation from higher-priced crude oil imports now,” the survey highlighted.
It added that a relatively undervalued rupee could provide some cushion against higher U.S. tariffs on Indian exports and poses little inflationary risk in the current environment, given stable crude oil prices.
The survey also noted that episodes of sharper rupee depreciation have typically coincided with periods of elevated current account deficit, such as in FY09, FY13, FY19, and FY23. However, it pointed out that strong and stable foreign investment inflows have, in some years, offset trade deficits and supported the currency, underscoring the role of capital flow dynamics in exchange-rate movements.
