The stability of the Indian rupee becomes a casualty as India’s net trade surplus in services and remittances is not enough to offset the goods trade deficit, the Economic Survey 2025-26 said, as the rupee on Thursday hit another lifetime low of Rs 91.98 per US dollar.
This was driven by sustained outflow of foreign portfolio investments (FPIs). FPIs withdrew $4 billion so far in January, and the outflow amounted to $11.8 billion in 2025.
“The Indian rupee underperformed in 2025. India runs a trade deficit in goods. Its net trade surplus in services and remittances is not enough to offset it. India depends on foreign capital flows to maintain a healthy balance of payments. When they run drier, rupee stability becomes a casualty,” the Survey said.
However, it added that the “rupee’s valuation does not accurately reflect” India’s stellar economic fundamentals, as the economic growth is good, the outlook remains favourable, inflation is contained, and rainfall and agricultural prospects are supportive. This comes at a time when exports could come under pressure due to steep 50 per cent US tariffs. While the impact on outbound shipments has been limited, exporters have said that fresh orders from the US have stopped coming in and continued US tariffs could cause irreversible damage.
The survey said that the rupee “is punching below its weight”, adding that it “does not hurt” to have an undervalued rupee in the current situation 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 at the moment.
“However, it does cause investors to pause. Investor reluctance to commit to India warrants examination,” the Survey said.
Services vs Manufacturing
The Survey emphasised that currency strength, in general, or currency stability during crises, has always eluded countries that could not become successful and significant exporters of manufactured goods. Countries with strong, stable currencies are known for their manufacturing excellence, it said.
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“India’s export performance since the start of the millennium tells its own story. In general, services exports have outpaced goods exports. In particular, over the five years since 2020, the compounded annual growth rate of total exports has been 9.4 per cent, while that of merchandise exports has been only 6.4 per cent. Services have done much of the heavy lifting, creditable and macro-stabilising, but not a substitute for the goods-based export ecosystems that ultimately underpin durable external and currency stability,” the Survey said.
The Survey said that the Information Technology-Enabled Services sector has been India’s mainstay for growth, and international experience indicates that while service exports are economically valuable, they do not systematically compel broad upgrades in state capacity, as successful firms can bypass weak institutions, relocate easily, and generate limited economy-wide pressure on governments to reform.
“Unlike manufacturing exports, they do not impose hard fiscal, employment, or logistical constraints on the State, allowing institutional weakness to persist even alongside globally competitive firms. So, manufacturing matters,” the Survey said.
The report said that India’s recent trade agreements are proof that policymakers have taken note of this. The Survey said that in the current global context, the agreement expands market access for India’s labour-intensive manufactured exports while enabling deeper integration with Europe’s technological and manufacturing capabilities.
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“The FTA with Europe can support the continent’s efforts to revitalise parts of its manufacturing base and, at the same time, strengthen India’s manufacturing competitiveness, export resilience and strategic capacity. Realising the potential of trade agreements requires that we can produce competitively,” the report said.
FPI outflow
The Survey said that FPIs were net sellers of Indian securities from April to December 2025 and that the relative underperformance of Indian equities compared to other major markets, alongside trade and policy uncertainties, the depreciation of the Indian rupee, and a broad-based global risk-off sentiment amid elevated U.S. bond yields, weighed on FPI flows.
“These factors dampened sentiment towards Indian equities, particularly export-oriented sectors such as IT and healthcare, resulting in continued FPI outflows in FY26 (April-December). However, it said that in the midst of volatile foreign capital flows, domestic institutional investors (DIIs), particularly mutual funds and insurance companies, have counterbalanced the volatility of foreign investment outflows and have provided much-needed support to the markets. With continued buying, as of September 30, 2025, DII ownership within NSE-listed equities stand at 18.7 per cent, the Survey added.
