Sinking rupee, growing economy

Nirmala Sitharaman’s latest budget is being presented under the most challenging global circumstances. She is also dealing with a paradox of sorts. Donald Trump and his tariffs loom large across the horizon, creating uncertainty and chaos, and the global capital strike is undermining the rupee’s stability. The rupee has fallen to a record low, nearly touching R92 against the dollar in January 2026, marking its worst performance in Asia. This is happening at a time when the finance minister is supposedly benefiting from the fast clip at which the economy is growing. Official estimates are projecting a 7.4 per cent growth for the full 2025-26. The announcement of GDP growth of 8.2 per cent in the second quarter of the year was greeted with the familiar ritual of celebration by the government, overlooking the warts that have appeared on the India growth story.

Apart from stellar growth, inflation has been subdued, with CPI inflation ending the year 2025 at 1.33 per cent, below the Reserve Bank of India’s (RBI) lower target band for the fourth consecutive month. The current account deficit as a percentage of GDP in the first half of 2025-26 is only 0.76, compared to 1.35 in the previous year. Other things are looking good as well – credit growth to rainfall, agriculture, and corporate balance sheets.

On the flip side, the rupee isn’t the only concern. Net foreign direct investment is down. Sell-off by foreign institutional investors – Rs29,000 crore this month – pushes the rupee down, and the falling rupee triggers further sell-off. Private consumption is verily K-shaped

‘IT services’ is the largest formal employer and consumption accelerator. India’s top five IT companies added just 17 net employees in the first nine months of 2025-26. Home sales are down 14 per cent in major metros. Houses priced below Rs75 lakh, which constituted 60 per cent of the sales, are now at 32 per cent, while those priced above Rs40 crore jumped 66 per cent in 2025. These are some of the issues that the FM will attempt to address in her latest budget.

Rupee backdrop to budget

The budget will be remembered for the backdrop against which it is being presented. The rupee’s decline is happening despite supposedly strong macroeconomic indicators, highlighting a divergence that is not easy to explain. It is officially claimed that the key drivers of the rupee’s fall are massive foreign investor outflows, a widening trade deficit, high dollar demand from importers and pressure from US trade tariffs.

Even private economists seem to agree. “The rupee’s performance this year was largely a capital-flow story, with the RBI adopting a more pragmatic and flexible approach to the exchange rate and allowing the currency to weaken,” says Gaura Sen Gupta, economist, IDFC First Bank. India’s balance of payments slipped into a roughly $22 billion deficit between April and November, the largest historically, indicating the external strains facing the economy. “A trade deal with the US could offer temporary relief, potentially lifting the rupee to about 88.50 by March, before underlying pressures reassert themselves and the currency weakens again,” she adds.

The seemingly diametrically opposed developments, which can be aptly described as the sinking-rupee, growing-economy syndrome, have left the common man perplexed, prompting him to question the veracity of our economic data and the explanations given to justify the depreciating rupee. In the common man’s view, a strong currency reflects a strong economy. Remember, the collapse of the great Roman empire started with the debasement of its currency, the silver denarius.

A strong economy is driven by factors like low inflation, political stability, high interest rates and significant trade surpluses. Among other things, a strong currency increases purchasing power and reduces import costs. Strong currencies are typically backed by stable economies, robust GDP growth, low unemployment and high foreign reserves.

Paradox fuels opposition

The current paradox, however, has given a handle to the Opposition to attack the Modi government and score brownie points. Alleging that data is being fudged to paint the picture of a ‘Goldilocks economy’, Rajeev Gowda, former professor, Indian Institute of Management, Bengaluru, and chairman, Congress party’s research committee, asks: “If the economy is doing so well, why is the rupee collapsing?”

The Kuwaiti dinar, Bahraini dinar and Omani rial were the top strong currencies of 2025; all of course were supported by oil wealth. The dollar, while not always the highest valued currency, is the strongest globally due to the overall economic size and stability of the US economy. That is why Uncle Sam can still strut around the global stage with impunity.

Trump travails

However, that may be a thing of the past as the dollar has sunk 2 per cent against a basket of foreign currencies since the start of 2026 and almost 11 per cent in the past year in a sign that global investors are growing bearish on Uncle Sam. Just recently, the greenback took its biggest one-day plunge since ‘Liberation Day’ tariffs rattled markets in April, when Trump – who previously spoke in favour of a weaker dollar – said he’s not concerned with the currency’s slide. While it briefly rebounded the next day, after Treasury Secretary Scott Bessent said the administration was pursuing a strong dollar, investors have not been able to shake off longer-term dollar worries.

Geopolitical tensions, like Trump’s recent spat with European allies over his Greenland annexation push, are causing scepticism about America’s future role in global finance. There is also the question of whether the Fed’s lowering of interest rates could fuel inflation, and whether the US government debt is unsustainable. That the dollar might be losing its status as a popular hedge in times of distress is evident from its value falling. At the same time, assets like gold and the Swiss franc are surging.

Trump has now moved in fast to contain the damage by nominating Kevin Warsh to be the 17th chair of the Federal Reserve, subject to confirmation by the US Senate. A long-time Trump ally and former central banker, Warsh is expected to favour lowering interest rates.

China’s recalibration

In our neighbourhood, China’s central bank is nudging the yuan higher, stoking speculation of a subtle shift in strategy toward favouring a stronger exchange rate, after strong exports brightened the nation’s growth outlook. The move suggests a modest recalibration in China’s earlier strategy, when it sought to keep the yuan stable in the face of a tit-for-tat tariff war with the US. 

The ‘Gulf rupee’

The rupee was the official, primary currency in several Arab Gulf states from the 19th century until the mid-1960s. This period saw the rupee used extensively for trade, salaries and savings in what are now modern nations, including Kuwait (until 1961), Bahrain (until 1965), Qatar (until 1966), Trucial States. During British rule, the rupee became the backbone of trade in the Indian Ocean, and the British government enforced treaties requiring Arab sheikhdoms to accept it as legal tender.

To prevent gold smuggling (where rupees were taken to the Gulf, exchanged for cheap gold and smuggled back to India), the RBI introduced a special series of notes in 1959 known as the ‘Gulf rupee’. The system ended following the 1966 devaluation of the Indian rupee by over 50 per cent, which caused significant financial losses to the Gulf states and prompted them to establish their own currencies. 

While the rupee was replaced in the 1960s, some vestiges of its influence remained. It was in 2022 that the UAE began embracing Indian UPI technology, harkening back to a time when the rupee ruled the Gulf. 

Today, the rupee is accepted directly only in Nepal and Bhutan. Some notes (R200 and R500) are legal tender in Nepal. The Reserve Bank of India (RBI) has made strides towards the rupee’s internationalisation by having Special Vostro Rupee Accounts for INR-denominated transactions like Russia, the UAE, Singapore, Oman, the UK, etc. But this is for trade settlement, not general tourist spending and aimed at reducing reliance on the dollar. This mechanism allows trading partners to pay in rupees directly, lowering currency conversion risks and costs. 

Low share in forex turnover

The rupee is not globally accepted on a par with the dollar or the euro primarily due to its low share in global foreign exchange turnover (roughly 1.7 per cent vs over 88 per cent for the dollar), limited convertibility and the need for greater economic stability, including lower inflation and controlled trade balances. While the RBI is actively promoting international trade settlement in rupees to reduce dollar reliance, it lacks the deep, widespread international reserve status enjoyed by major currencies. 

Why can’t the status be reversed? The Modi government should use out-of-the-box ideas to attract capital inflows. This includes using NRI investments as a significant driving force in shaping the trajectory of the economy. NRIs want exposure to the India growth story, but the tax system is pushing them away. High tax burdens and a lack of awareness around cross-border tax rules are quietly eroding returns for non-resident Indians (NRIs) investing in India, potentially discouraging overseas capital inflows, says Aryan Singh, co-founder, Rupeia, a fintech firm. In a recent LinkedIn post, Singh highlighted how Indian mutual funds – often marketed as tax-efficient domestically – can become punitive investments for NRIs based in countries like the US and Canada due to foreign tax regulations. 

Hands-off approach

The rupee’s fall should be at the back of the FM’s mind when she gets up from her seat to present the budget in Parliament. Sitharaman has so far adopted a hands-off approach. Responding to the question about whether the Indian currency is at a level that is too high against the dollar, she has time and again stated, “The rupee will find its own level”. Asked about the nationalist and political aspect attached to the currency weakening naturally, the FM acknowledged that, while in Opposition, her party had raised the issue of a falling rupee, but added that when they raised the issue, the economic circumstances were different. “I am quite tempted to say a lot of things. Rupee, currency exchange rates, etc., are rather too sensitive... inflation rate was so high back then, the economy was fragile, and when your currency also takes a hit, it is nobody’s bright spark,” she said at the Hindustan Times Leadership Summit in December.

A similar view was expressed by V. Anantha Nageswaran, Chief Economic Adviser, around the same time. The government is not ‘losing sleep’ over declining rupee; the falling rupee is neither affecting inflation nor exports, he said on the sidelines of a CII event.

But what if it starts impacting inflation? The Economic Survey, authored by Nageswaran just a month later and tabled in Parliament two days before the budget, has, however, aired the apprehension that inflation is expected to edge up gradually in the coming fiscal. The RBI and the International Monetary Fund (IMF) have projected a progressive increase in headline inflation towards the 4 per cent target over the next two years. While further depreciation of the rupee could open the door to imported inflation, its impact is expected to be limited by declining global commodity prices, especially crude oil. At the same time, rising prices of precious metals and select base metals may keep core inflation elevated.

While stating that India has become ‘a victim of geopolitics’, the Economic Survey admits that the rupee’s valuation causes investors to pause.

And while an undervalued rupee helps to offset the impact of higher US tariffs, the investors’ reluctance to commit to India warrants examination. The problem thus is that, as India runs a merchandise trade deficit that is not fully cancelled out by services

trade surplus, it depends on foreign capital inflows to maintain a healthy balance of payments. “When they run drier, rupee stability becomes a casualty,” the Survey states.

No sudden casualty

The casualty did not happen overnight. From trading at about R60 to the dollar in 2014 (the year Narendra Modi swept to power), the rupee breached the psychologically crucial Rs90 mark in December 2025 – a significant loss in value in just 11 years. The crisis crystallised in 2025. After ending 2024 at Rs85.47 to the dollar, the rupee slid rapidly, touching a record low of Rs90.17 on 3 December 2025 – which marked its steepest annual fall since 2022 and the worst performance among major Asian currencies this year. From its strongest point in May 2025 at Rs84.22, the rupee depreciated over 7 per cent in just seven months, reflecting the sharp erosion of investor confidence.

The RBI decision on 5 December 2025, to cut the repo rate by 25 basis points – despite the currency’s free fall – was a tacit admission that policymakers have deprioritised defending the rupee in favour of propping up the economy. But, as some economists believe, rate cuts in an import-dependent economy under capital outflow conditions are an invitation to further depreciation. And that’s what happened.

The RBI manages the Rupee by acting as the sole issuer of currency, regulating foreign exchange (forex) to control volatility and implementing monetary policy to maintain price stability. It intervenes in the forex market by buying/selling dollars, manages foreign exchange reserves, and controls currency circulation to ensure economic stability.

In the normal course, the central bank steps up its interventions in foreign exchange markets, including the offshore non-deliverable forward market, to curb rupee volatility. Currently, this may seem prudent: defending stability in turbulent times, especially with Trump’s tariff shocks unsettling global trade. However, there is a growing view that such intervention comes at a cost. Artificially engineering stability through relentless interventions risks weakening market discipline, creating systemic vulnerabilities and draining valuable reserves. Worse, the intended benefits – boosting exports or shielding against inflation – are modest at best.

The RBI’s approach to rupee swings saw a change after Sanjay Malhotra became governor in December 2024. Under Malhotra, the RBI has become more tolerant of currency weakness, with its market interventions primarily aimed at managing depreciation expectations and countering the build-up of one-sided speculative positions. This was most evident in mid-December, when the rupee fell past the 91-per-dollar mark for the first time. The RBI intervened heavily to rein in speculative pressures while not defending a specific level.

Lack of vision?

Some critics say that the rupee crisis is neither a routine exchange-rate adjustment nor a transient response to global shocks. It is, in fact, a verdict on a growth model sustained by lack of vision, data manipulation, and structural dependence, even as the government continues to project an image of economic triumph through selective statistics and nationalist rhetoric. That is why the fault-lines are becoming obvious.

The actual impact of the RBI’s monetary policy depends on the broader macro and global backdrop. A rate cut reduces domestic interest rates, boosts liquidity and encourages credit growth – but it also lowers the yield advantage of Indian assets, typically adding depreciation pressure on the rupee, particularly during periods of strong global dollar demand or weak foreign inflows. On the other hand, maintaining or raising rates reflects a tighter stance, which tends to stabilise or strengthen the rupee by keeping India’s interest-rate differential attractive.

What can the government do to prop up the rupee to a respectable level? Not much, argue some economists. The macro-economic risks that India faces are on the exchange rate front, as in the event the outflow of capital continues combined with headwinds to exports, the currency will be under pressure, feels Ranen Banerjee, partner, government sector leader, PwC India. “This could inflate the import bills and feed into inflation and put pressure on the current account balance,” he says. “Since the monetary policy is outside the purview of the budget, the only way the budget can support the macro is through continued adherence to fiscal prudence by keeping the deficit in check, reducing the debt-GDP ratio and keeping the quality of budgetary spend high.”

But, surely, there is much more the government can do outside the budget! It can push forward policies that enhance productivity and export competitiveness. It has finally realised that finalising pending trade deals is essential to enhance market access.

Role of remittances

Remittances are an important source of foreign currency that helps prop up the rupee against depreciation. When the rupee depreciates (falls), it incentivises Non-Resident Indians (NRIs) to send more money back home, as their foreign currency (like the dollar) buys more rupees, which further boosts the total inflow and provides a self-correcting mechanism for the currency. 

Aggregating $135 billion, remittances directly increase India’s foreign exchange reserves. A robust reserve, which exceeded $670 billion in 2025, enables the RBI to intervene in the spot and forward currency markets, selling dollars to prevent the rupee from sliding into a free fall. Inward remittances are thus a major external financing source, financing roughly half of India’s merchandise trade deficit. This large inflow reduces the pressure on the current account balance, thereby supporting the value of the rupee.

Unlike volatile foreign direct investment (FDI) or portfolio flows, remittances are steady and often increase during times of crisis (such as pandemics, oil price shocks, etc) as NRIs increase support for their families. While Gulf countries (the UAE, Saudi Arabia) remain important, over 50 per cent of remittances now come from advanced economies like the US, the UK and Singapore, reflecting a shift toward higher-skilled, higher-earning diaspora, providing a more robust and stable inflow. Some official moves have helped. The February 2023 agreement between India and the UAE to use local currencies (rupees and dirhams) for trade has encouraged more remittances to flow through official, regulated channels. 

Encouraging the channelisation of remittances into financial instruments (like NRI deposits or investment in equities) rather than just consumption can lock in foreign funds, providing long-term stability to the currency. While remittances play a part, attracting NRI money is another area. If NRIs can pour in $135 billion by way of remittances, they can also be wooed to spend and invest in India.

Wooing the diaspora to invest

Every year, waves of the Indian diaspora come back home drawn by family, career opportunities, entrepreneurship, and a growing sense that India is where the next phase of their lives belongs. They generally return frustrated, having become too used to a less complex life in what is clearly now their home country. India, for all of its economic potential and opportunities, remains a challenging country in which to succeed, given its institutions and business environment.

Amid homecoming logistics, schooling decisions and career resets, one issue that routinely bothers non-residents in India is taxation. Filing taxes in India can be complex for returning residents. Fresh rules on residential status, overseas income, foreign assets, applicability of the Double Taxation Avoidance Agreement (DTAA) and compliance – many of which did not apply earlier – often catch them off guard. The result is what tax professionals call ‘return shock’, when long-held assumptions no longer hold.

Indian income tax law hinges almost entirely on residential status. That status, however, is not intuitive and does not change the moment someone lands in India. It depends on the day counts in the year of return and the individual’s stay pattern over the previous years.

Loss of status

For instance, NRIs returning to India permanently lose their status, based on the number of days they spend in India during the financial year of return. If they return after October in a given fiscal year, they typically remain NRIs for that year as their stay in India is less than 182 days. However, if they return before October, they may lose NRI status in the same year.

After losing NRI status, returnees are classified either as Resident but Not Ordinarily Resident (RNOR) or Resident and Ordinarily Resident (ROR). RNOR is a transitional status intended to ease the transition to full Indian residency. An individual qualifies as RNOR if he was an NRI in at least nine of the 10 preceding years, or if his stay in India was 729 days or less in the previous seven years or, in certain high-income cases, with a limited stay.

RNORs enjoy tax treatment similar to NRIs, with only Indian income taxed. Over time, this benefit ends, and global income becomes taxable once ROR status applies.

However, during the intermediary phase, there is confusion as tax residency under the Income Tax Act and residential status under FEMA (Foreign Exchange Management Act) are governed by different rules and timelines. Differences between calendar years abroad and India’s financial year can further complicate reporting, especially when income spans two systems, warns Deepesh Chheda, partner, Dhruva Advisors.

Complex property tax

Similarly, the current tax regulations around the sale of property are quite complex, leading to significant fund blockage for NRIs who are selling property. A Deloitte pre-budget report indicates that 12.5-31.2 per cent of an NRI property seller’s funds can be stuck with the tax department, restricting his ability to reinvest or take advantage of tax-saving instruments.

If Sitharaman wants to win over the NRIs and their money, she can now recalibrate the taxation architecture applicable to them in respect of Indian-source income by focusing on rationalisation rather than expansion of the tax base. In relation to interest, capital gains, and rental income, the emphasis can be on moderating excessive withholding and aligning collection mechanisms with actual tax incidence.

“This can manifest through refinements to withholding rates on interest and rent, smoother access to lower or nil deduction certificates in capital transactions and greater coherence between computation provisions and tax deducted at source,” says Tushar Kumar, advocate, Supreme Court of India. “While the substantive charge to tax may remain broadly intact, the manner and timing of collection, particularly in high-value property and investment exits, can be softened to reduce cash-flow distortions and prolonged refund cycles that presently afflict non-resident taxpayers”.

On residency, she can make a beginning towards overhauling the statutory framework by altering its practical application. With the impending operationalisation of the revamped Income-tax legislation and prior tightening around high-income visitors and deemed residency, the scope for clarification, threshold calibration, and procedural streamlining remains significant.

Residency rules & clarifications

Among other things, the government can consider refining day-count rules, RNOR contours and income-based triggers to reduce ambiguity, while strengthening data-driven residency determinations through immigration and financial reporting linkages. Such changes, though technical, have the potential to materially affect borderline cases and re-characterise individuals who traditionally considered themselves non-resident for Indian tax purposes. Finally, Budget 2026 should revisit the mechanics of tax deducted at source (TDS), surcharge and treaty implementation, as they apply to NRIs, recognising that compliance friction often outweighs revenue benefit.

The overall trajectory should balance revenue protection with administrative equity, reinforcing India’s stated objective of being a stable and credible tax jurisdiction for global Indians.

However, while it’s natural to speculate about what the Budget 2026 should bring, it is essential to also note that, on the introduction of the Income-tax Act 2025 (to be in force from 1 April 2026), it was specifically highlighted that there have been no policy changes made. “Further, it is also observed that the government has seamlessly introduced amendments through previous budgets to streamline the tax and procedural aspects,” says Kunal Savani, partner, Cyril Amarchand Mangaldas. “For instance, the long-term capital gains remain 12.5 per cent plus applicable surcharge and cess for both residents and non-residents”.

All this needs to be reassessed now. Such steps would be more meaningful than merely handing out certificates at Pravasi Bhartiya jamborees, if we are to really deploy the earth in the hands of our global Indians.