The rupee attracts attention only when it falls sharply. Between March and May 2026, it weakened by nearly `6 against the US dollar as oil prices rose and foreign investors pulled money out of India. The decline triggered headlines, television debates, and warnings from economists. Now, with oil prices falling below $85 a barrel after the US-Iran peace deal, the rupee is expected to stabilise and perhaps regain some ground. As that happens, the debate will fade.
But the real issue is not the latest rise or fall in the exchange rate. It is the rupee’s long-term decline. In 1991, one US dollar bought about Rs 23. By 2006, it bought Rs 46. By mid-2025, the rate was around Rs 85, rising to about Rs 90 in early 2026 and nearly Rs 95 today. Short-term swings dominate the news, but the steady loss of the rupee’s value over decades has far greater consequences for India’s economy.
A weaker rupee makes essential imports such as oil, electronics, fertilisers, and machinery expensive, driving up inflation and reducing purchasing power. Contrary to what many economists suggest, exporters often do not benefit from a weaker rupee as foreign buyers negotiate lower dollar prices for the same goods.
Poor households bear the greatest burden as higher fuel, transport, and food costs squeeze their budgets. Over time, currency depreciation also increases the cost of foreign debt, undermines investor confidence, slows economic growth, and weakens government finances through lower tax revenues .’
How should the government and the Reserve Bank of India (RBI) respond? With the rupee falling faster than usual like in the past few months, the RBI may sell dollars from its reserves, attract dollar deposits, and take steps to discourage speculative bets against the rupee. However, lasting rupee stability will require deeper structural reforms. We propose six actions.
Ensure stable crude oil supplies. About 50% of India’s oil imports pass through the Strait of Hormuz, which remains a conflict zone despite the recently announced US-Iran deal, while nearly 30% of imports last year came from Russia, which faces US sanctions pressure. Since India imports almost 90% of its oil, any disruption in global supplies poses serious risks to the economy. India should therefore sign long-term oil supply agreements with reliable partners such as Russia, ignoring the US pressure, build larger strategic oil reserves when prices are low, and increase domestic oil and gas exploration.
Push manufacturing and exports. In FY26, India’s merchandise imports reached $775 billion. It is expected to cross $950 billion this year. The only way to balance the high import bill is through expanding manufacturing in electronics, machinery, energy equipment, and industrial inputs, which will also increase exports and improve India’s long-term economic stability. Our balance-of-payments woes will largely disappear if our merchandise exports increase from $445 billion to $800 billion.
An important condition for becoming a manufacturing hub and attracting capital is improving ease of doing business and reducing manufacturing costs. Global companies compare financing costs, power tariffs, logistics, infrastructure, and regulatory efficiency before deciding where to set up factories. Despite lower wages, India often remains a high-cost manufacturing destination due to high financing costs, logistics costs, and regulatory delays. India also needs a transparent and predictable policy environment in which businesses can compete freely without perceptions of special treatment or policy uncertainty.
Invest in artificial intelligence (AI) infrastructure, semiconductors, and deep-tech innovation to attract the large global capital now flowing into the AI sector. India’s progress remains limited mainly to a few startups. We need to invest in a new set of entrepreneurs as most large Indian IT firms that have the scale and resources to compete do not look interested in cutting-edge AI development.
Focus on quality FPI flows. Foreign portfolio investment (FPI) is often called “hot money” because it can enter a country quickly when US interest rates are low and leave just as quickly when they rise. India should focus on attracting more stable, long-term investors rather than relying heavily on short-term capital flows. China offers a useful example. It closely monitors foreign portfolio flows and retains the ability to intervene when needed, while encouraging long-term investment. India does not need to copy China’s controls, but it can place greater emphasis on financial stability and reduce its dependence on volatile portfolio flows.
Reconsider trade deal with the United States, as it would require India to buy $500 billion in American goods over five years. Such large additional imports would increase dollar outflows and sharply erode INR value.
The current fall in the rupee is unusual because India is facing pressure from both trade and capital flows at the same time. In the past, strong foreign investment often offset large trade deficits and helped support the currency. Oil prices have risen from about $72 per barrel in February to nearly $110 in May, increasing India’s import bill and demand for dollars for few months.
At the same time, foreign investors have withdrawn around $53 billion since late 2024, while net foreign direct investment flows have turned negative. Concerns about slower economic growth and high US interest rates leading to more attractive returns on US assets have further weakened investor confidence.
Lasting rupee stability cannot come from short-term interventions alone. India needs deeper reforms that strengthen energy security, manufacturing, exports, and technology. A stronger economic foundation will reduce dependence on imports, make India more resilient to global shocks, and strengthen investor confidence in the India growth story.
By Ajay Srivastava, Founder, Global Trade Research Initiative
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.
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