The Indian rupee underperformed in 2025 and remains vulnerable in 2026 despite strong macroeconomic fundamentals, according to the Economic Survey 2025-26, which warns that foreign capital flow disruptions could strain the currency further.
"The rupee is punching below its weight," the Survey stated, arguing that its current valuation does not reflect India's "stellar" growth, low inflation, strong corporate and bank balance sheets, and robust credit flows.
India runs a persistent trade deficit in goods, while its services and remittance surplus falls short of bridging the gap. As a result, the country remains dependent on capital inflows to sustain its balance of payments. When those flows slow, the rupee becomes collateral damage.
The Survey acknowledged that a weaker rupee cushions some tariff shocks, especially amid rising US protectionism and noted that lower crude oil prices have so far kept inflation in check. But it cautioned that investor hesitation toward India deserves scrutiny.
The Survey lays out three global risk scenarios for 2026, all posing challenges for the rupee:
Managed Disorder (40-45% probability): Global trade and growth remain intact but fragile. Geopolitical tensions, financial stress, and policy uncertainty create volatility requiring frequent government intervention. The world stays integrated but increasingly distrustful.
Multipolar Breakdown (40-45% probability): Strategic rivalries intensify, conflicts such as Russia-Ukraine remain destabilizing, and trade becomes coercive. Sanctions, fractured supply chains, and financial contagion define this scenario, with countries prioritizing autonomy over growth.
Systemic Shock Cascade (10-20% probability): Financial, technological, and geopolitical shocks feed into each other. A potential correction in AI-heavy, leveraged investments could trigger market stress worse than the 2008 crisis, tightening global liquidity and capital flows.
Even though India is better placed than many nations with strong reserves, a large domestic market, and a less financialized growth model, the rupee remains exposed to external tremors.
To respond, the Survey calls for greater foreign currency earnings, stronger buffers, diversified payment systems, and consistent policy credibility. It says India must "run a marathon and sprint simultaneously" to stay resilient.
