India’s rupee has lost an average of 3.8% annually since the Modi government took office in 2014. The forward markets now expect the rupee to lose another 3.0% in each of the next five years.
This is an improvement. But what does a currency’s continued weakness say for an economy expected to become the fourth largest in the world within the next five years, behind only the United States, the European Union and China?
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As with any commodity, a currency’s value is determined by its demand compared to the demand for its denominator, which in the rupee’s case is the U.S. dollar.
The dollar’s strength compared to a basket of emerging market currencies has been consistent as opposed to the wave-like movements that characterize the dollar’s performance against developed market currencies.
We can point to the dollar’s strength as playing a major role in the rupee’s weakness.
But there are also domestic economic considerations behind the rupee’s weakness, beginning with India’s persistent current account deficit.
India buys more from its trading partners than what it sells, with its dependence on imports of fossil fuels a substantial share of its current account deficit.
We also suspect that geopolitical stress has affected the flow of foreign direct investment into India, which peaked in 2020 at $64 billion before dropping to $27 billion in 2024, according to an analysis by the World Bank.
Confidence in India’s economic policies as measured by the flow of investment appears to have contributed to the rupee’s weakness.
The takeaway
The weakness of India’s rupee belies its role as the world’s fifth-biggest economy, with the rupee and other emerging market currencies continuing to struggle against the dollar.
The foreign-exchange market expects India’s currency weakness to continue over the next five years as its economy continues to run a current account deficit and as geopolitical stress limits the inflow of foreign investment.
