Rupee at Record Low Signals Need for Deep Structural Reforms in Indian Economy

The Indian rupee’s slide to 96.91 against the US dollar on May 20 has reignited concerns about the country’s economic resilience and external sector vulnerabilities. With the currency depreciating nearly 16.1 per cent over the last 18 months, the rupee has emerged as Asia’s worst-performing major currency for the second consecutive year. While the Reserve Bank of India (RBI) has attempted to contain the fall through aggressive market intervention, economists argue that the crisis reflects deeper structural weaknesses that monetary measures alone cannot resolve.

The debate intensified after IMF First Deputy Managing Director Gita Gopinath remarked that the rupee should function as a “shock absorber” and that excessive intervention in currency markets may prove counterproductive. Analysts largely agree with this assessment but stress that a shock absorber can work effectively only when the broader economic structure is strong.

India’s foreign exchange reserves, which peaked at nearly $728 billion in February 2026, have fallen to around $692 billion after the RBI reportedly spent more than $30 billion in just three months to stabilize the currency. Despite these efforts, the rupee continued to weaken, highlighting the limitations of intervention when underlying economic imbalances remain unresolved.

A key factor behind the rupee’s weakness is the widening trade deficit. India’s quarterly trade deficit touched a record $83.2 billion in the second quarter of FY2024-25, even though Brent crude prices averaged around $80 per barrel. This marks a sharp contrast with the first quarter of FY2022-23, when the trade deficit stood at $62.6 billion despite crude prices soaring to $113 per barrel.

Economists point out that the problem is no longer driven solely by oil imports. Rising imports of electronics, gold, and capital goods have outpaced the growth of merchandise exports, creating a structural imbalance in the external account. The trend suggests that India’s dependence on imports has deepened even during periods of relatively moderate energy prices.

Another major concern is the changing composition of foreign capital inflows. In FY2021, India’s external financing was supported by both strong Foreign Portfolio Investment (FPI) inflows of $36 billion and net Foreign Direct Investment (FDI) of nearly $39 billion. However, by FY2024, net FDI had plunged to just $10.1 billion, while FPI inflows surged to $40.7 billion, largely driven by enthusiasm around India’s inclusion in global bond indices.

This growing dependence on portfolio flows has increased vulnerability to global financial sentiment. Unlike long-term FDI, FPI is highly volatile and can reverse rapidly during periods of uncertainty. The risks became evident in FY2026 when foreign investors pulled out nearly $17.7 billion from Indian markets, marking the largest outflow since India opened its markets to foreign portfolio investors in 1993. March 2026 alone reportedly witnessed outflows worth Rs 1.26 lakh crore.

Experts believe that India must now undertake three critical structural reforms to restore long-term currency stability.

The first priority is reducing the current account deficit through a strong export-oriented manufacturing strategy. While initiatives such as the Production-Linked Incentive (PLI) scheme have encouraged domestic production, analysts argue that India still lacks a clear roadmap for building globally competitive export sectors at scale. Without significantly expanding manufacturing exports, the rupee is likely to remain vulnerable to commodity price fluctuations and global financial shocks.

The second challenge is rebuilding investor confidence to attract stable FDI instead of relying excessively on volatile portfolio flows. Frequent policy changes, retrospective taxation disputes, and regulatory uncertainty have contributed to a perception of unpredictability among foreign investors. Economists warn that India must create a more stable and transparent investment climate if it hopes to secure long-term capital inflows.

The third reform involves giving the RBI a more transparent and rules-based framework for currency intervention. Rather than targeting a fixed exchange rate, experts suggest that the central bank should clearly communicate the principles guiding its interventions. At the same time, India must deepen domestic bond and derivatives markets to allow businesses and investors to hedge currency risks more effectively.

Despite current pressures, analysts maintain that India’s broader economic fundamentals remain relatively strong. However, continued depreciation raises import costs, fuels inflation, and increases the burden of servicing external debt estimated at over $682 billion.

The rupee’s decline, economists argue, is not merely a currency problem but a reflection of deeper structural issues within the economy. Stabilizing the currency in the long term will depend less on defending exchange rates and more on building an economy capable of sustaining confidence, competitiveness, and durable capital inflows.