Even as policymakers continue to project confidence in the nation’s long‑term fundamentals, the rupee’s steep depreciation, widening trade imbalances, and persistent investor exits expose fault lines that cannot be overlooked. External shocks, entrenched structural weaknesses, and accelerating capital flight are beginning to cast doubt on the durability of India’s growth story.
The rupee’s slide to nearly ₹96, with widespread expectations of further depreciation against the dollar, stands as the starkest signal of strain. India’s merchandise trade deficit widened to $28.38 billion in April. Exports to West Asia fell 28 per cent year‑on‑year, highlighting the direct impact of geopolitical instability on India’s external balances.
While India’s foreign exchange reserves remain substantial at nearly $700 billion, the pace of depletion and the rupee’s slide have raised fears of a currency crisis. Policymakers have intervened to stabilise reserves and contain import costs, yet the deeper challenge remains structural because India’s reliance on imported energy and inputs leaves the economy acutely vulnerable to external shocks. While the current shock is contractionary in nature, the combination of global dollar strength and rupee weakness risks spiralling into inflationary pressures beyond threshold limits.
Foreign portfolio investors have withdrawn nearly $50 billion from Indian equities in just 18 months, reflecting concerns over stretched valuations, weak corporate earnings, and regulatory uncertainty. FDI exits and rising outward remittances have compounded the pressure, with overseas education, foreign travel, and investments draining forex reserves. The Reserve Bank of India has tightened scrutiny of overseas direct investments after outflows surged to $27 billion in FY26, nearly double the levels two years earlier.
This capital flight signals waning investor confidence. India’s appeal has been dented by tax concerns, compliance burdens, and a perception of regulatory unpredictability. The fintech sector illustrates this shift vividly: once valued on user growth and gross merchandise value, companies like Paytm, Pine Labs, and PB fintech stocks have seen massive corrections.
The rupee’s fall and oil shock have translated into rising fuel and food costs, intensifying inflationary pressures. Petrol and diesel prices increased by ₹3 per litre, while milk prices climbed by ₹2 per litre, squeezing household budgets. Economists estimate that combined fuel and dairy hikes could add 0.42 per cent to CPI inflation, with indirect effects through transport and logistics costs.
Oil marketing companies are reportedly losing nearly ₹1,000 crore daily due to elevated crude prices, underscoring the fiscal strain. Fertiliser imports from China surged 173 per cent in FY26, making it the second‑largest supplier after Russia. Russia remained the top source, with shipments rising 35 per cent to 6.71 million tonnes. This dependence raises concerns about food security and rural stability, particularly as monsoon variability adds uncertainty.
The government’s response has combined austerity with renewed emphasis on self‑reliance. Prime Minister Modi has urged fuel conservation and import reduction, and a push for greater reliance on work‑from‑home practices. These steps underscore both the severity of the external shock and the narrow policy space available. The effort is directed at easing balance‑of‑payments pressures, where the current account deficit for now remains below 2 per cent and therefore not alarming by conventional thresholds. The deeper concern lies in the flight of portfolio capital; financial outflows that weaken the rupee, erode investor confidence, and expose the fragility of India’s external position.
The rhetoric of Atmanirbhar Bharat or Self‑reliant India has gained urgency amid external shocks. Speaking at a CII event, Uday Kotak called for a shift in dependence on foreign capital and to build a strong domestic pool of long‑term risk capital to achieve true self‑reliance.
But self‑reliance requires more than slogans. India’s private sector investment remains subdued, manufacturing competitiveness lags, and R&D spending is chronically low. Exports have risen modestly, supported by electronics and engineering goods, but the trade deficit persists. The rupee’s weakness discourages exporters from converting dollar earnings, adding to the RBI’s burden.
Infrastructure gaps, high logistics costs, and a real exchange rate misalignment continue to weigh on competitiveness. Small and medium enterprises, the largest source of employment for educated youth, are struggling to pass on cost increases, creating risks of job losses and a consumption slowdown. This employment fragility compounds the macroeconomic challenge, as weak demand undermines growth momentum.
Driven by deteriorating rural labour markets, India’s unemployment rate climbed to 5.2 per cent in April, the highest in six months, reflecting the combined impact of inflation, weak farm incomes, and limited non‑farm opportunities. Small enterprises, already struggling with compliance costs and rising inputs, are unable to absorb labour effectively.
This employment challenge spills into consumption, as households cut spending amid rising costs. The social implications are significant: inflation erodes real incomes, unemployment fuels discontent, and austerity measures risk alienating vulnerable groups. The political economy of reform thus becomes more complex, as policymakers must balance fiscal discipline with social stability.
In the midst of this, the government could have lowered taxes, such as long‑term capital gains or duties on fuel, to incentivise foreign investors and ease pressure on households. Instead, India imported $72 billion worth last year despite already holding 30,000 tonnes domestically. Raising import duties to 15 per cent only fuels smuggling, whereas encouraging citizens to sell their existing gold would create a local supply and reduce dependence on imports. Solutions lie in resolving unresolved tax disputes with ₹39 lakh crore locked in litigation, and ₹19 lakh crore in active disputes.
Vaishali Basu Sharma
The rupee’s weakness is discouraging exporters from converting dollar earnings and intensifying pressure on India’s external balance. Gold and silver imports alone account for nearly 2 per cent of GDP, and even a modest reduction could significantly ease the current account deficit. Managing this strain may require allowing a gradual weakening of the rupee to restore competitiveness, while simultaneously tightening curbs on non‑essential imports and overseas outflows. Temporary restrictions on outward remittances under the Liberalised Remittance Scheme and stricter limits on overseas investments could become necessary if external pressures deepen.
The author is a security and economic affairs analyst.
Opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.
