Economic Survey Highlights Rupee's Vulnerability Amid Trade Imbalances and Capital Flight
The Economic Survey for 2025-26, presented on Thursday, January 29, 2026, has delivered a sobering assessment of the Indian rupee's stability, declaring it has become a casualty of persistent structural challenges. The report was released on a day when the currency plunged to a fresh lifetime low of Rs 91.98 per US dollar, underscoring the immediate pressures facing the economy.
Trade Deficit and Insufficient Offsets Weigh Heavily
According to the comprehensive government document, India's substantial goods trade deficit continues to exert downward pressure on the rupee. While the nation maintains a net trade surplus in services and benefits from robust remittance inflows, these positive elements are not sufficient to counterbalance the deficit in merchandise trade. This imbalance creates a fundamental vulnerability in the country's external account.
The survey explicitly stated, "India runs a trade deficit in goods. Its net trade surplus in services and remittances is not enough to offset it. India depends on foreign capital flows to maintain a healthy balance of payments. When they run drier, rupee stability becomes a casualty."
Sustained FPI Outflows Exacerbate Currency Pressure
Compounding the trade issue is a significant and sustained exodus of foreign portfolio investments (FPIs). The survey revealed alarming data: FPIs withdrew a net $4 billion in January 2026 alone, following a total outflow of $11.8 billion throughout 2025. This capital flight has directly contributed to the rupee's depreciation.
The document detailed several factors behind this investor retreat:
- The relative underperformance of Indian equity markets compared to other major global markets.
- Ongoing trade and policy uncertainties, particularly concerning international relations.
- The depreciating trend of the rupee itself, which can deter foreign investment.
- A broad-based global risk-off sentiment driven by elevated U.S. bond yields.
These factors collectively dampened sentiment, especially towards export-oriented sectors like IT and healthcare, leading to continued FPI outflows in the first three quarters of the 2025-26 fiscal year.
Rupee "Punching Below Its Weight" Despite Strong Fundamentals
In a notable observation, the Economic Survey argued that the rupee's valuation does not accurately reflect India's underlying economic strength. The report pointed to stellar fundamentals, including solid economic growth, a favourable outlook, contained inflation, and supportive agricultural prospects due to good rainfall.
The survey introduced the metaphor that the rupee "is punching below its weight". Interestingly, it suggested that an undervalued rupee might not be entirely detrimental in the current global context. It can partially offset the impact of higher American tariffs on Indian exports by making those goods cheaper in dollar terms. Furthermore, with crude oil prices currently manageable, the threat of imported inflation from a weaker currency is subdued.
Silver Lining: Domestic Investors Provide Crucial Support
Amid the volatility caused by foreign capital movements, the survey highlighted the stabilizing role of Domestic Institutional Investors (DIIs). Entities such as mutual funds and insurance companies have actively counterbalanced the FPI outflows, providing essential support to the financial markets.
Through continued buying, DII ownership in NSE-listed equities had risen to 18.7 per cent as of September 30, 2025. This demonstrates a growing depth and resilience in India's domestic capital markets, which can act as a buffer against external shocks.
Export Concerns and Investor Hesitation Linger
The report also acknowledged headwinds for exporters, particularly due to steep 50% US tariffs. While the immediate impact on export volumes has been limited, the survey noted that fresh orders from the US have stalled, and prolonged high tariffs could cause irreversible damage to trade relationships.
Perhaps most concerning was the survey's candid admission regarding investor sentiment. It stated, "However, it does cause investors to pause. Investor reluctance to commit to India warrants examination." This points to a need for policymakers to address the underlying factors causing foreign capital to hesitate, despite the country's strong economic story.
In conclusion, the Economic Survey 2025-26 paints a picture of a currency caught between robust domestic fundamentals and challenging external realities. The rupee's stability is being tested by a stubborn trade deficit and fleeing foreign capital, even as domestic investors step up to fill the void. The path forward requires careful management of both trade policies and investor confidence to ensure the currency's value better reflects India's economic potential.
