The Rupee in Context: Macroeconomics and Portfolio Considerations

As we move into 2026, India’s economic fundamentals reveal a combination that may initially appear counter-intuitive.

On the domestic front, the economy is demonstrating significant structural resilience. Real GDP growth remains among the strongest globally, with India consistently expanding at over 7%.This is supported by a meaningful moderation in headline CPI inflation, corporate balance sheets that are at their healthiest in over a decade, and a banking system that is robustly capitalized.

However, exchange rates are shaped as much by global capital dynamics as by domestic strength. Against this backdrop, the Indian Rupee (INR) has continued its gradual adjustment against the US Dollar (USD), recently trading near the 91 level after a year of consolidation between 86 and 90.

As advisors, we often receive a variation of the same question:                                                                         
How can a structurally strong economy coexist with a depreciating currency?                                                 
To answer this, we must move away from viewing a currency as a "national scorecard" and instead view it as a market-clearing price influenced by global capital flows, trade balances, and interest rate differentials.

A Decade of Data: INR’s Long-Term Trajectory 

To understand the 2025 valuation, it is essential to step back and view the Rupee’s movement over a multi-year horizon. Historically, the Rupee has not undergone "disorderly collapses"; rather, it has experienced a steady, managed realignment.

Historical Price Levels: 

• 2014–15: ~ INR 60–62 per USD
• 2018-19: ~ INR 68–70 per USD
• 2020 (Covid): ~ INR 75–76 per USD
• 2022–23: ~ INR 82–83 per USD
• 2025: ~ INR 89–91 per USD

This data reflects an average annual depreciation of approximately 3–4% over the last decade. This trajectory is not indicative of economic crisis, but rather a reflection of three specific macro fundamentals:

1. Inflation Differentials: India maintains structurally higher inflation compared to developed economies.
2. Trade Dynamics: A persistent current account deficit driven by the essential import of energy, electronics, and gold.
3. Capital Integration: India’s deeper integration with global financial markets has made the Rupee more sensitive to global capital flows, causing it to move with international risk cycles rather than just domestic fundamentals.

Identifying the Drivers of the 2025 Adjustment

The recent movement in the exchange rate is a result of a combination of global and domestic factors, rather than a single trigger.

1. Global Trade and Automatic Stabilizers

Renewed global trade tensions and the implementation of higher tariffs in various regions have increased uncertainty for export-oriented emerging markets. In such environments, a flexible currency acts as an automatic stabilizer. A moderately adjusted Rupee improves India’s export competitiveness, helping to offset external pressures without the need for direct fiscal intervention.

2. Foreign Investor Outflows

In 2025, Foreign Portfolio Investors (FPIs) have moderated their exposure to Indian equities, resulting in net outflows of approximately INR 1.5 lakh crore. When these global investors exit domestic positions, they must convert Rupees back into Dollars, creating a natural, supply-demand driven pressure on the exchange rate that is independent of actual domestic growth.

3. Dollar Demand from Global Rebalancing

While US rate cuts have lowered the Dollar’s appeal as a return asset and boosted demand for gold, global trade, debt servicing, and portfolio rebalancing remain largely Dollar-based. During periods of uncertainty, this structural demand for Dollars creates near-term pressure on the Rupee, even when India’s fundamentals remain stable.

4. Current Account Realities

India continues to maintain a current account deficit (CAD) in the range of 1–1.5% of GDP. While this deficit is well-funded and manageable within the current macro framework, it naturally places a limit on any sustained appreciation of the currency.
 

Why RBI Isn’t ‘Panic Defending’ The Rupee

The Reserve Bank of India (RBI) holds a substantial foreign exchange buffer, close to USD 700 billion, largely in foreign currency assets, with the remainder spread across gold and IMF-related holdings. This provides comfort during periods of currency pressure. But reserves are not a force field. Their effective use is shaped by composition, and in a global FX market that trades trillions of dollars each day, prolonged defence of any specific exchange rate can quickly become impractical and, at times, counterproductive.

Against this backdrop, the RBI’s role has been less about resisting every move in the rupee and more about ensuring that those moves remain orderly. The objective is not to prevent currency adjustment altogether, but to avoid abrupt or disorderly shifts that can unsettle markets and confidence.

This measured stance rests on three pragmatic considerations:

• Export Competitiveness: A degree of currency flexibility supports Indian exporters as global growth remains uneven and supply chains continue to realign.

• Inflation Transmission: While currency depreciation can feed into domestic prices, the pass-through has moderated over time, helped by stronger supply chains, improved food availability, and better monetary transmission. That said, sharp or persistent depreciation would still warrant careful monitoring.

• Orderly Adjustment: Gradual currency movements allow businesses, investors, and households to adjust balance sheets and financial decisions over time, reducing the risk that market moves translate into sudden stress.

Personal Finance: The Concept of "Currency-Linked Inflation"

While macroeconomic stability remains intact, individual financial objectives that involve global spending will face higher nominal costs. It is helpful to view this not as economic stress, but as currency-linked inflation.

Consider the impact on common global financial goals:

Note: These increases are not reflected in standard domestic inflation (CPI) data, yet they directly impact the purchasing power of a Rupee-denominated portfolio for global use.

A Thoughtful View on Portfolio Alignment

The objective of financial planning is not to forecast the day-to-day movement of the Rupee, but to ensure that asset allocation is aligned with future liabilities after adjusting for currency and inflation.

1. Liability-Driven Asset Allocation

If you anticipate future expenses in Dollars, such as a child’s education abroad or international travel, the relevant benchmark is not Indian inflation alone, but US inflation for that expense plus long-term Rupee depreciation. Planning with this currency-adjusted liability framework brings clarity to return expectations, even when the core portfolio is invested in Indian markets.

That said, holding a portion of the portfolio in global, Dollar-denominated assets, preferably through diversified index investments that creates a natural hedge, allowing savings to grow in the same currency as future costs and improving alignment between assets and liabilities.

2. Mitigation of Home Bias

Indian equities remain a powerful engine for long-term wealth creation, but they offer limited insulation against currency movements. Over the past decade, the Nifty 50 and S&P 500 generated broadly similar returns in local currency terms; however, when viewed in US dollar terms, Nifty 50 returns were lower by roughly 3.5% annually. The broader Nifty 500 performs marginally better, yet the currency drag remains evident—underscoring how international diversification can enhance risk-adjusted returns while helping preserve global purchasing power.

3. Proactive Financial Calibration

For investors earning in Rupees but spending (or planning to spend) globally, the historical 3–4% annual depreciation must be factored into savings targets today. Relying on "currency reversals" is not a substitute for a structured, realistic savings plan.

Final Perspective

The movement of the Rupee toward the 90 level is a reflection of India’s maturing role within a complex, globalized financial system. It is a macroeconomic reality that requires observation, but not panic.

While national policy remains focused on broad stability and competitiveness, personal financial planning must focus on protecting individual lifestyle goals. By recognizing this distinction, investors can transition from reactive concern to a structured, long-term strategy anchored in historical data and clear-eyed global objectives.

Written By : Sahil Gupta & Rutuja Patil