BT Explainer: Strong GDP, weak rupee: Why India cannot stop its currency from falling

India’s economy is growing faster than those of many major economies, yet the Rupee has weakened every year since 2018. The divergence highlights a key vulnerability: strong domestic growth does not automatically translate into a stronger currency, particularly when a country depends heavily on imports and foreign capital to finance its external needs.

The Rupee’s latest decline reflects a combination of global shocks and structural weaknesses. US President Donald Trump’s steep tariffs on Indian imports intensified pressure last year, prompting foreign investors to pull money out of Indian equities amid concerns about trade, high valuations and weak corporate earnings. This year, the Iran war and the resulting surge in energy prices have added to the strain.

Why is the rupee under pressure?

According to a Bloomberg News analysis, India imports most of its oil requirements. When crude prices rise, Indian importers need more dollars to pay for energy, increasing demand for the US currency and putting downward pressure on the rupee. Higher import bills can also widen the current-account deficit, increasing the economy’s need for external financing.

Foreign capital flows have compounded the problem. Foreign investors have sold more than $30 billion of Indian stocks since the beginning of 2026, according to the Bloomberg explainer. When investors withdraw funds, they typically convert rupees into dollars, adding to demand for the US currency. A weaker Rupee can also reduce dollar-denominated returns for overseas investors, potentially making Indian assets less attractive.

The pressure extends beyond immediate geopolitical developments. India’s historically higher inflation can erode the price competitiveness of domestic goods relative to products from other countries. Volatile food prices, supply-chain inefficiencies and low productivity in parts of the informal economy have contributed to inflationary pressures.

Why has RBI intervention failed to reverse the decline?

The Reserve Bank of India (RBI) has intervened in currency markets by selling dollars from its foreign-exchange reserves. It has also introduced measures to attract dollar inflows, including encouraging Indians living abroad to deposit money with domestic banks.

The government has sought to reduce foreign-currency demand by allowing higher global oil costs to pass through to consumers and restricting gold imports. More recently, the RBI has tightened foreign-exchange derivatives rules and created a special dollar window for public-sector oil refiners to reduce their demand in the regular spot market.

These measures can ease immediate pressure, but they cannot eliminate the underlying causes of depreciation. If oil prices remain elevated, foreign investors continue withdrawing capital and import demand stays strong, dollar demand can persist despite central-bank intervention.

Can the rupee recover?

An end to the Iran war and a decline in oil prices could ease pressure on India’s balance of payments. Stronger capital inflows and improved export competitiveness could also support the currency.

However, Bloomberg notes that the rupee was already at its weakest level in almost 12 years on a real effective exchange rate basis before the conflict, according to central-bank data. This measure adjusts for inflation and compares the rupee against the currencies of India’s major trading partners.

The RBI has maintained that its interventions aim to curb excessive volatility rather than defend a particular exchange rate. Governor Sanjay Malhotra has previously described annual depreciation of around 3% as “quite natural” given India’s higher inflation relative to advanced economies.

Ultimately, lasting currency stability will depend not just on RBI intervention, but also on inflation, energy dependence, export competitiveness and the ability to attract sustained foreign capital.