Despite Exceptional GDP Numbers, the India’s Rupee Faces Unexpected Pressure

Contents

Muted Earnings Growth Casts a Shadow Over India’s Strong GDP Run Persistent FPI Outflows Deepen the Rupee’s Vulnerability New Trade Headwinds and Policy Delays Add Fresh Pressure Slower Nominal GDP Growth Raises Concerns on Corporate Profitability Investors See the Rupee as Undervalued Despite the Short-Term Stress

The financial markets were left perplexed when, instead of celebrating India’s impressive 8.2% GDP growth, the Indian rupee weakened sharply, falling 0.3% on the very day the country posted one of its strongest quarterly expansions. For a nation that has consistently positioned itself as one of the fastest-growing large economies, the rupee’s depreciation has raised important questions for investors.

On the first trading day after the GDP announcement, all key market instruments—stocks, bonds, and the rupee—moved lower. Even the Nifty 50, which opened by setting a new record high of 26,300, reversed course midday as the weakening rupee pulled sentiment back.

So, why is the Indian rupee under pressure when economic growth is surging? A closer look reveals that the currency is caught in a complex mix of structural headwinds, shifting global trends, and unexpected domestic shocks.

Muted Earnings Growth Casts a Shadow Over India’s Strong GDP Run

India’s solid macro story—7.4% growth in Jan–March, 7.8% in April–June, and now 8.2% in July–September—is not being reflected in corporate earnings. Despite strong consumption and investment trends, Nifty 50 EPS growth has remained stuck in low-to-mid single digits for six consecutive quarters.

This disconnect is troubling investors. The lack of earnings momentum has pushed valuations to the expensive zone for almost a year. This sentiment spillover has contributed directly to the pressure on the rupee, as foreign investors remain hesitant despite the strong GDP narrative.

Also Read : Indian Rupee Drops to New All-Time Low of 89.76 Versus the US Dollar

Persistent FPI Outflows Deepen the Rupee’s Vulnerability

The most significant force pushing the Indian rupee lower has been the steady foreign portfolio investor (FPI) outflows. India has witnessed net FPI outflows of around $15 billion in FY25 and more than $16 billion already in FY26, creating a rare capital account deficit.

In the last three decades, India has run a comfortable capital surplus—even during periods of high current account deficits—except during exceptional shocks like the Lehman collapse (FY09) and the US taper tantrum (FY12). This time, however, India is experiencing two consecutive years of balance-of-payments deficits, an unusual situation that naturally weighs on the rupee.

FPIs are also looking for high-growth themes such as artificial intelligence, an area where India currently doesn’t offer large listed opportunities. North Asian markets—China, Taiwan, and Korea—are attracting more attention because they house global AI leaders, while India and other BRICS peers lag on this front.

New Trade Headwinds and Policy Delays Add Fresh Pressure

Beyond earnings and capital flows, three incremental developments have significantly hurt the rupee in recent weeks:

1. The delayed US–India trade deal dented market expectations

Markets widely expected a crucial trade agreement with the US to be finalized by November. When those expectations collapsed last Friday, traders quickly increased long-dollar positions, triggering immediate downward pressure on the rupee.

2. A record-high trade deficit shocked currency markets

October’s trade deficit surged to $41 billion, the highest monthly figure ever. The jump forced economists to revise the current account deficit (CAD) forecast from 0.7% to between 1.2% and 1.4% of GDP.
While a 1.2% CAD is not alarming historically, markets were simply not priced for the sudden shift. As a result, rupee depreciation accelerated once the October data was released.

3. Expectations of losing access to discounted Russian crude

Traders now believe that the steady flow of cheap Russian crude—which had acted as a buffer for India’s import bill—may diminish going forward. This expectation has made the market less optimistic about near-term rupee stability.

Slower Nominal GDP Growth Raises Concerns on Corporate Profitability

Even as real GDP has surged, the nominal GDP growth of 8.7% in Q2 is at a multi-year low. India’s nominal expansion has typically ranged around 12%, except during extraordinary shocks. Lower nominal growth often means weaker pricing power and slimmer corporate earnings—another reason global investors remain cautious.

Investors See the Rupee as Undervalued Despite the Short-Term Stress

Amid the pessimism, there is a growing belief among global institutions that the Indian rupee may now be undervalued. Analysts at Goldman Sachs, Morgan Stanley, and several domestic brokerages suggest that Indian equities and the rupee could soon present attractive entry opportunities as valuations cool and macro stability returns.

The rupee’s recent turbulence may well be the “darkest hour before dawn” moment, signaling a stabilisation phase ahead as global risk appetite improves and domestic fundamentals recalibrate.