Explained | Rupee’s journey from 80 per dollar to 90 in 5 charts: on the role of trade, FDI, and RBI

India’s current account balance is largely driven by the goods trade deficit, or the excess of what the country pays for its merchandise imports over what it receives for its exports. As the chart above shows, the two deficits – current account and the goods trade – track each other, with the difference between the two being the surplus India has on the services front and the inflows it gets from transfers such as workers’ remittances. But the current account deficit and trade developments may not be behind the rupee’s current bout of weakness, according to Rahul Bajoria, Head of India and ASEAN Economic Research at BofA Global Research.

“What we are seeing in India now is essentially a capital flows-driven weakness cycle to a large extent, which is probably driven by the anxiety on the growth front, the impact of the unfinished (India-US) trade deal, and similar such factors,” Bajoria told The Indian Express on Wednesday.

Capital flows have indeed been an issue, with Foreign Portfolio Investors (FPIs) pulling out almost $18 billion on a net basis from Indian equity markets in 2025 alone. And non-equity FPI inflows, while positive, have been only half that.

The “terrain” has also changed significantly on the Foreign Direct Investment (FDI) front, as Chief Economic Advisor V Anantha Nageswaran explained this week. A combination of higher interest rates in developed countries discouraging investment in emerging markets such as India and a global emphasis on manufacturing more at home has been a drag on FDI. Meanwhile, the localisation of supply chains, Nageswaran said on Wednesday, is one of the reasons why Indian entities’ overseas investments have gone up “because in order to sell into those markets, you have to be present there these days rather than being able to export there”.

As the chart above shows, outbound FDI by Indian companies and repatriation of money put in by foreign investors in previous years picked up sharply starting 2023, such that they total $60 billion in the first nine months of 2025, on track to reach 2024’s $80 billion, resulting in a net FDI inflow of just under $3 billion.
Net FDI is calculated after adjusting for investments that are repatriated by foreign companies and overseas investments made by Indian companies.

RBI’s role and reserves

All of the above put pressure on the rupee to depreciate. If it happens too fast in the RBI’s opinion, then it intervenes in the foreign exchange market to stabilise the exchange rate by selling foreign currency – which increases its supply – to buy rupees – thus pushing up demand for it. And the RBI sold as much as $400 billion of foreign currency in 2024-25, with the central bank particularly active in the run-up and post the US presidential elections of last year that saw Donald Trump return to the White House.

However, the RBI’s interventions have eased significantly in 2025-26 – coinciding with Sanjay Malhotra becoming the governor of the RBI – adding up to just $44 billion in the first half of the fiscal on a gross basis, indicating a “higher tolerance” for rupee depreciation, according to Gaura Sen Gupta, Chief India Economist at IDFC First Bank. Sen Gupta sees the rupee at 91 per dollar by September 2026, even if India and the US announce a trade deal by March 2026.

Intervention by a central bank does not only show up in its foreign currency sales; it can also check the rupee’s fall by selling dollars in the forwards market – essentially creating the exchange rate impact dollar sales have without actually selling them right now, but at a later, predetermined date. This is especially useful because the act of selling dollars to buy rupees creates a shortage of the latter, driving up rupee interest rates. At a time when the RBI is busy cutting interest rates, such a move would be counterproductive. This makes forward sales particularly useful as they don’t influence the current rupee supply.

The RBI’s net forward position was over $60 billion in the negative at the end of October. These dollars will have to be ‘actually’ sold by the RBI at some point ranging from the next one month to after one year. One way to adjust for these forward dollar sales is to remove the negative number from the RBI’s foreign exchange reserves, which stood at $688 billion at the end of November. Remove the net forward book of negative $64 billion, and the forex reserves are in reality not very far from $600 billion.