The Economic Survey highlighted the deficit in goods trade and dependence on foreign portfolio investors as factors contributing to the rupee's weakness. This has found its way into national debate since the stability of the currency is a direct issue on inflation, cost of imports, and investor confidence. This is significant as it formulates policy discussions on export competitiveness, rates of capital outflows, and resilience in the long run of the external sector in India.The Indian Rupee has hit another record low ahead of the 2026 budget, settling at 91.97 against the US dollar.
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Key highlights
- Overview of Rupee's Stability
- Goods Trade Deficit and Its Effects on the Rupee
- Reliance on FPIs Affecting Rupee
- Undervaluation as a Cushion for the Rupee
- Implications and Way Forward for India
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The Economic Survey highlights the dynamic nature of forces that determine the stability of the Indian rupee and places its level of performance in the broader context of imbalances between trade and capital flows. Although India has developed in terms of economic status, the development of a significant level of goods trade deficit and the necessity to depend on foreign portfolio investors (FPIs) have made the currency susceptible to external shocks. The fact that the Survey believes that the rupee is punching below its weight is symptomatic both in its structural flaws as well as its strategic buffers, as undervaluation partially counters tariff pressure of advanced economies. The resolution of this paradox comes due to the necessity to question the nexus between the deficit in trade and capital dependency, as well as the resilience of the currency in the long term.
The Economic Survey 2025-26, tabled in Parliament on January 29, 2026, highlights that the Indian Rupee (INR) has been "punching below its weight" despite India's strong macroeconomic fundamentals. The currency hit a record lifetime low of ₹92.04 per US Dollar on January 28, 2026.
Economic Survey 2025-26: Overview of Rupee's Stability
The Economic Survey 2025-26 has taken note of the poor performance of the rupee as it has been observed that, irrespective of the good fundamentals of India, its currency stability is still susceptible to trade deficit and high volatility in terms of capital movement.
Effect of Structural Trade Imbalances on the Rupee
The central factor causing instability of the rupee is the continuous deficit in goods trade in India. Crude oil, electronic, and gold imports are regularly surpassing exports, which generates the long-term demand for foreign exchange. The rupee trade deficit further increased, and in January 2026, it went down to a lifetime low ofINR 91.98 per US dollar, as per the Economic Survey 2025-26. Services exports and remittances are also beneficial as they create a surplus, but are not capable of covering the merchandise gap, and the rupee is still vulnerable to external shocks.
Foreign Portfolio Investors (FPIs) Affecting the Rupee
The second aspect of instability comes due to the dependence of the Indian economy on foreign portfolio investments (FPIs). FPIs are very reactive to the perceptions of risks all over the globe and cause unexpected inflows and outflows. In January 2026, FPIs pulled out money amounting to 4 billion dollars, adding to the cumulative outflows of 11.8 billion in 2025. The volatility increases pressure on the rupee as compared to foreign direct investment (FDI), which is more stable and long-term.
Undervaluation as a Cushion for the Rupee
The Survey admits that the rupee is punching below its weight, but states that the undervaluation offers a short-term relief against external tariffs, especially on the part of the United States. The undervaluation counterbalances part of the negative impacts of the increase in American duties because it made Indian exports relatively cheaper. This, however, cannot be a replacement for structural changes to fortify the external sector in India.
Why India’s Currency Stability is a Casualty of Structural Imbalances?
Based on the Economic Survey 2025-26 and recent economic data, India’s currency stability has become a "casualty" of structural imbalances because the economy is structurally designed to import more than it exports, requiring constant reliance on volatile foreign capital to maintain a balanced payment.
Economic Survey 2025-26: Goods Trade Deficit and Its Effects on the Rupee
In India, the Economic Survey 2025-26 emphasizes the fact that the weakness of the rupee has been directly associated with the ongoing goods trade deficit, which is undermining external stability in spite ofstrong services exports and inflows in remittances.
Goods Trade Deficit in India
The trade deficit in Indian merchandise arises due to the imports, which keep surpassing exports, especially those dealing with energy, electronics, and gold. The Economic Survey 2025-26 indicated an all-time low of INR 91.98 to every US dollar in January 2026, which was the pressure caused by this imbalance. Although services exports, as well as private transfers, are strong, they cannot cover the merchandise gap, which exposes the currency to external shocks.
Indian Sectors causing Trade Deficit
The importance of crude oil imports to the external bill in India is also substantial, and it is also accompanied by the increasing popularity of the demand for electronics and machinery. The deficit is extended by the importation of gold due to the cultural and investment bias. This structural reliance persists in burdening the current account, as shown by a bulletin issued by the Reserve Bank of India in March 2025, even though thisreliancehas been pursued by the policies on behalf of export diversification.
Impact on Rupee Stability in India
The deficit puts direct pressure on the demand for foreign currency, undermining the value of the rupee. This depreciation is increasing import prices, inflationary pressure, and has reduced investor confidence. The Survey acknowledges that despite the surplus of the services of more than USD 135 billion in FY26, the merchandise gap is the leading factor in the currency volatility.
Reliance on FPIs Affects the Rupee
The Economic Survey of 2025-26 in India highlights that reliance on foreign portfolio investors (FPIs) exposes the rupee to risks as its changeable flows influence the external stability and the currency performance to a great extent.
Volatility of FPI Flows in India
FPIs are very sensitive to the international financial status, which causes sudden inflows and outflows. The Economic Survey 2025-26 has stated that FPIs pulled out in 2025 $11.8 billion, of which USD 4 billion was in January 2026 alone, with the rupee falling to INR 91.98 per US dollar. This volatility is in contrast to the foreign direct investment (FDI), centred on the long-term and more stable.
Capital Shift from India
The Survey notes that the increased U.S. bond yields and investments in capital redirection towards AI-centric markets such as the U.S., Taiwan, and Korea enhanced the FPI outflows of India. In the period of April to December 2025, FPIs were net sellers of Indian equities, and resulted in a net outflow of USD 3.9 billionin December 2025. This highlights the fact that India is vulnerable to external shocks other than the domestic fundamentals.
Impact on Rupee Stability
High dependency on FPIs leaves the country in a susceptible external situation. The abrupt withdrawals lower the foreign exchange reserves, investor confidence, and put the rupee under downward pressure. Equity sell-offs affected export-oriented industries (like IT and healthcare), especially, which contributed to even greater volatility of the currencies further.
Implications and Way Forward for India
The Economic Survey 2025-26 underlines the need for structural changes to ensure currency stability in India because trade deficits and unstable capital flows have plagued the currency in spite of short-term insulation of undervaluing.
India Requires Export Diversification
The limited scope of India, relying on a few items of an export basket, restricts its capacity to offset the balance of the merchandise trade. The Survey has indicated that whilst services exports contributed to a surplus of USD 135 billion during FY26, the merchandise imports contributed to widening the current account gap. To lessen vulnerability, the need to export more high-value manufacturing, especially in electronics and renewable technologies development, should be accomplished.
Empowering Indian Domestic Capital Markets
The instability of foreign portfolio investors (FPIs), whose net outflows are USD 11.8 billion in 2025 necessitate the need to enhance the involvement of domestic institutional investors (DII). India can minimize foreign assistance which is in the short term by strengthening pension funds, insurance companies, and sovereign wealth systems and balancing capital inflows.
India Needs to Manage External Shocks
According to the Survey, undervaluing the rupee neutralizes the pressure of tariffs by the United States, but this is only a tactical cushion. The ability to have energy security, lower gold imports, and strategic reserves is needed to build long-term resiliency against external shocks.
Way Forward for Rupee Stability
The policy needs to target export competitiveness, capital market reforms, and fiscal prudence. India can correct these balance sheet mistakes and have the rupee reflect its real economic power, and leave the present paradox of punching below its weight.
Conclusion
To sum up, the Economic Survey 2025-26 points out that the structural trade deficit and reliance on volatile flows of foreign portfolios destabilize the rupee. Although undervaluation gives a reprieve in terms of external tariff pressure, it is also an expression of intrinsic weaknesses within the system. To achieve long-term resilience, there must be diversification of exports, energy security, and deeper domestic capital markets. Such imbalances will be eliminated to bring the rupee closer to the fundamentals of the Indian economy and make it appear more credible and competitive within the global financial architecture.
Frequently Asked Questions (FAQ)
Truist expects the economy to grow by 2.3% throughout 2026, while other Wall Street economists project growth between 2% and 2.5%. A White House official noted that Lutnick’s outlook aligns with the Atlanta Fed’s forecast of 5.4% GDP growth in the fourth quarter.
The Economic Survey 2026 provides a comprehensive annual assessment of India’s economic performance, offering a structured analysis of the country’s overall growth trajectory, sector-wise performance in agriculture, industry, and services, and key trends in infrastructure, employment, investment, and trade.
In 2026, India’s high-growth sectors are being powered by rising consumption, rapid digitalization, and strong government initiatives. Consumer Goods and Retail are set to expand on the back of higher incomes, while IT and technology—especially AI and FinTech—continue to surge. Renewable energy, infrastructure and logistics, and financial services are gaining momentum due to digital adoption, the ‘Make in India’ push, and rising demand for credit and services. Healthcare, electric vehicles, and specialty chemicals are also poised for significant growth.
Over the next decade, India’s top investment sectors are expected to include renewable energy, supported by strong government backing; IT and digital services such as AI, fintech, and e-commerce; healthcare, including pharmaceuticals and vaccines; infrastructure spanning EVs, railways, and real estate; FMCG and consumer goods driven by rising incomes; and financial services, particularly digital banking and NBFCs. Growth will be fueled by government initiatives like Make in India and the green energy push, expanding domestic consumption, and rapid digital adoption, with green technology, electric vehicles, and digitally enabled services emerging as key growth drivers.