India’s Economy Surges While the Rupee Slips: Understanding the New Normal

India’s strong GDP growth alongside a weakening rupee reflects a structural shift rather than a contradiction. Robust domestic demand, investment and services exports drive expansion, while external pressures—trade deficits, volatile capital flows and high global interest rates—pull the currency down. The RBI’s flexible approach and ongoing reforms aim to strengthen India’s external resilience amid this new economic reality.

India’s economic markers are flashing two very different signals. On one side, growth indicators are glowing bright green—real GDP jumped 8.2 percent in Q2 FY26, the strongest showing in a year and a half. On the other, the currency is sliding—the rupee slipped past 90 to the US dollar in late 2025, erasing nearly 9 percent of its value since mid-year.

For households and businesses, this contrast feels confusing. News of strong economic momentum clashes with rising prices for imported goods. Investors see upbeat GDP projections but watch the rupee behave like it’s under stress. Policymakers grapple with an economy that looks sturdy internally but vulnerable to global shocks.

Yet this isn’t a contradiction. India’s rapid expansion and its weakening currency are part of the same ongoing shift in how the economy interacts with global conditions. To understand this new reality, we need to examine the crosscurrents shaping the country’s trade dynamics, capital flows, policy decisions and long-term growth path.

A Structural Break Between Growth and the Rupee

Traditional economic models suggest that strong GDP growth should lure foreign capital and strengthen a country’s currency. But global finances no longer obey this old script. With global interest rate cycles, geopolitical uncertainty and higher capital mobility, growth alone cannot secure currency strength.

Despite India posting the fastest GDP growth among major economies, the rupee has continued to soften. The explanation lies in external pressures—trade balances, interest differentials and investor sentiment—rather than domestic output.

Even nominal GDP growth has undershot government forecasts, partly because a weaker rupee raises input costs and squeezes profit margins. Currency depreciation is now acting as a quiet drag on nominal expansion.

India’s domestic story is upbeat. Its external position is less so—and the rupee reflects that reality.

External Pressures Are Weighing on the Currency

Exchange rates reflect how a country performs globally, not how it grows at home. And India’s external sector is under strain despite robust GDP numbers.

The merchandise trade deficit stayed wide at over 87 billion dollars in Q2 FY26. Although the current account gap has eased to 1.3 percent of GDP, the improvement is largely driven by services exports and remittances, not a turnaround in goods trade.

Capital flows have added to the currency’s woes. A wave of foreign portfolio inflows early in FY25 flipped into net outflows by mid-FY26. With US interest rates staying elevated and the dollar strengthening worldwide, global investors pulled back from emerging markets—including India.

Unsurprisingly, the rupee ended 2025 as Asia’s weakest performer. This slide wasn’t triggered by collapsing fundamentals but by global investors using the rupee as a hedge and by India’s heavy dependence on dollar-priced energy.

Seasonal gold imports surged as households sought protection against further depreciation. But higher gold demand only widens the trade deficit, creating a self-perpetuating cycle of weakness.

The Monetary Trilemma at Work

India, like all open economies, must choose between three goals: free capital movement, a fixed exchange rate and independent monetary policy. It cannot achieve all simultaneously.

India has chosen to preserve monetary autonomy and keep capital markets relatively open—meaning the exchange rate must absorb global shocks. With the US Fed holding real rates high, the RBI cannot afford to match those levels without damaging domestic investment.

Instead, the central bank has allowed the rupee to adjust gradually. Its interventions—over 10 billion dollars in Q2 FY26—have focused on limiting volatility, not defending a fixed level. Reserves dipped, but this was a controlled strategy, not a panic response.

A flexible currency is a feature, not a flaw, of this policy approach.

Who Gains and Who Loses in a Weaker-Rupee Environment

A depreciating currency reshapes the landscape unevenly.

Beneficiaries include:

• IT and business services firms, whose dollar earnings translate to higher rupee revenues.

• Pharma exporters, whose cost structures favor a weaker currency.

• Households receiving overseas remittances.

• Manufacturing sectors that compete with imports.

Those hurt include:

• Oil refiners, airlines and chemical companies facing higher dollar-linked costs.

• Consumers who rely on imported goods.

• Firms with unhedged foreign currency loans.

• Government budgets strained by rising energy and fertilizer import bills.

  
  

Still, inflation has remained contained thanks to lower global commodity prices, tax reforms and productivity improvements—preventing the weaker rupee from becoming an inflationary shock.

A Quiet Reorientation of India’s Growth Strategy

Beyond the headline GDP numbers lies a subtle shift in what drives the economy.

India’s growth is becoming more investment-led rather than consumption-driven. Infrastructure spending remains strong, manufacturing output is holding up, and private capital formation continues at a steady pace.

Meanwhile, the narrow gap between real and nominal growth—unusual during periods of currency weakness—suggests rising efficiency and productivity gains offsetting cost pressures. This points toward a more mature, supply-driven growth pattern.

The RBI Is Normalizing Currency Flexibility

The era of defending fixed rupee levels is over. In its place, the RBI has adopted a more sustainable strategy:

• smoothing currency swings rather than resisting them

• managing reserves judiciously

• focusing on inflation control instead of exchange-rate optics

• recognizing the rupee as a stabilizing tool

  
  

This approach aligns with India’s growing integration into global markets and supports long-term planning for exporters, investors and the government.

Allowing the rupee to find its natural level encourages a stronger export base and nudges the economy toward reduced import dependence.

What the Rupee’s Slide Really Signals

A softer rupee is not a verdict on India’s economic strength. Instead, it highlights key structural challenges:

• Domestic demand is booming, but external performance remains the weakest link.

• Heavy energy reliance continues to anchor India to global oil dynamics.

• Capital flows remain sensitive to international rate cycles.

• Growth is outpacing the evolution of India’s export ecosystem.

  
  

The simultaneous rise in GDP and fall in the rupee is not contradictory—it reflects the different forces shaping domestic and external conditions.

Policy Priorities for a Strong-Growth, Soft-Currency Era

India’s goal should not be to chase a strong rupee, but a stable one grounded in fundamentals.

Immediate priorities include:

• keeping inflation in check

• supporting exporters with better logistics and trade frameworks

• moderating gold imports

• maintaining adequate reserves without excessive intervention

  
  

Long-term reforms are essential:

• reducing dependence on imported electronics, energy and capital goods

• expanding manufacturing exports

• deepening local bond markets

• diversifying energy sources and building resilience

• broadening trade partnerships

  
  

A competitive rupee, paired with strong fundamentals, will serve India better than a cosmetically strong exchange rate.

A New Phase in India’s Economic Story

India’s rapid expansion alongside a sliding currency is not a crisis—it is a hallmark of a transforming emerging economy. GDP growth captures domestic confidence, while the rupee reflects external pressures.

Together, they show a nation growing rapidly while navigating the realities of global integration.

As India approaches the 4 trillion dollar milestone, its economic foundation is becoming more diversified, resilient and investment-led—even if the currency appears soft. With continued reforms and external-sector strengthening, India’s trajectory will be defined not by the rupee’s level but by the robustness of its underlying fundamentals.