Indian Rupee Under Pressure: Why It Is Sliding Against the Dollar While China and Pakistan Gain Ground

The Indian rupee has emerged as the worst-performing currency in Asia against the US dollar in recent months.

Over the last five months, the rupee has weakened by more than 6%, while several neighbouring currencies have moved in the opposite direction.

During the same period, Pakistan’s currency appreciated by around 0.5%, and China’s yuan gained nearly 3%.

To understand why the rupee is struggling, it is important to first understand how currency values are determined.

Understanding the Dollar-Rupee Relationship

Currencies are traded in the foreign exchange (Forex) market, a massive global network where banks, financial institutions, exporters, importers, and investors buy and sell currencies electronically.

Like any other market, currency values are largely influenced by demand and supply.

The US dollar dominates international trade, accounting for nearly 88% of global transactions.

As a result, countries around the world hold large amounts of dollars in their reserves. In fact, roughly 57% of global foreign exchange reserves are held in US dollars.

Because of its global acceptance, the dollar serves as the benchmark against which most currencies are measured.

When demand for dollars rises, other currencies tend to weaken.

At present, India is spending more dollars than it is receiving, creating pressure on the rupee.

As a result, one US dollar is currently trading close to ₹95. Several economic factors have contributed to this sharp decline.

 Rising Crude Oil Prices Increased India’s Dollar Requirement

India imports more than 85% of its crude oil needs from overseas markets, and these purchases are settled in US dollars.

Oil alone accounts for nearly 22% of India’s total import expenditure.

The conflict involving Iran triggered a significant surge in global crude oil prices, pushing them from around $72 per barrel to as high as $126.

Even now, crude prices remain elevated at approximately $88.7 per barrel.

According to rating agency ICRA, every $10 increase in crude oil prices adds an extra burden of $14-16 billion to India’s import bill.

As oil became costlier, India needed more dollars to pay for imports, putting additional pressure on the rupee.

 Foreign Investors Have Been Pulling Money Out of India

Foreign capital enters India mainly through two channels:

• Foreign Institutional Investors (FIIs), who invest in stock markets.
• Foreign Direct Investment (FDI), where overseas companies invest directly in businesses, factories, or infrastructure projects.

In 2025, foreign investors withdrew approximately ₹1.66 lakh crore from Indian equities. In the first five months of 2026 alone, withdrawals crossed ₹2.26 lakh crore.

Since foreign investors convert their money into dollars when exiting India, the demand for dollars rises, weakening the rupee.

Economist Dr Sharad Kohli points out that overseas investors have been booking profits and reducing exposure to India since late 2024.

One reason is that Indian stocks are trading at relatively higher valuations compared to several other emerging markets.

The situation is also visible in FDI flows. Net FDI—the difference between investment coming into India and money flowing out—has dropped dramatically from $28 billion in 2022-23 to nearly $1 billion in 2024-25.

This sharp decline means fewer dollars are entering the Indian economy.

As a result, India’s position in global stock market rankings has slipped from fourth place to seventh.

Data from the National Securities Depository Limited suggests that foreign investors have withdrawn an amount equivalent to what they invested over the previous decade.

 Currency Speculation Has Added to the Pressure

Some economists believe market sentiment itself has accelerated the rupee’s decline.

Economist Dr Jayati Ghosh argues that many traders are betting on further depreciation of the rupee.

Such speculative activity often creates additional downward pressure on the currency.

Professor Arun Kumar explains that many exporters have delayed bringing their dollar earnings back into India, expecting the rupee to weaken further and provide them with a better exchange rate later.

At the same time, importers are purchasing dollars in advance to protect themselves from future currency losses.

This combination increases demand for dollars and reduces supply, worsening the rupee’s decline.

Experts also note that such expectations can encourage foreign investors and even some Non-Resident Indians (NRIs) to move funds out of India.

 Investor Confidence Has Weakened

According to Professor Arun Kumar, several developments have hurt international investor sentiment toward India.

Following Donald Trump’s return to office, tariffs of up to 50% were reportedly imposed on certain Indian exports.

Additionally, questions raised by the International Monetary Fund (IMF) regarding India’s GDP calculations have created uncertainty among investors.

As confidence weakens, fewer foreign funds enter the country, reducing dollar inflows.

Meanwhile, the US Dollar Index—which measures the dollar’s strength against six major currencies including the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc—has also strengthened.

Following the Iran conflict, the index climbed from 97.6 to 99 and briefly crossed the 100 mark.

A stronger dollar globally naturally puts pressure on emerging-market currencies, including the rupee.

Why Are China and Pakistan Performing Better?

This naturally raises an important question: if China’s yuan and Pakistan’s rupee have strengthened, why is India’s currency losing ground?

Historical data paints an interesting picture.

Between 2004 and 2014, the rupee weakened from ₹45 to ₹59 per dollar, a decline of roughly 31%. That works out to an average depreciation of around 3% annually.

However, from 2014 to 2026, the rupee has fallen by nearly 61%, averaging close to a 5% decline every year.

Many economists argue that structural issues within the Indian economy are contributing to this trend.

 Insufficient Investment in Future Technologies

The world is witnessing a technological transformation driven by artificial intelligence and advanced innovation.

The United States has committed nearly $500 billion toward AI-related initiatives, while China is investing around $80 billion.

India’s allocation is estimated at roughly $2 billion.

The gap becomes even more apparent when looking at research spending. India spends only around 0.65% of its GDP on Research and Development (R&D), compared with approximately 3% in both the US and China.

Although China’s economy is about five times larger than India’s, its research expenditure is more than twenty times greater.

America’s economy is roughly twenty times larger, yet its R&D spending exceeds India’s by nearly one hundred times.

Professor Arun Kumar argues that without developing new technologies, India will struggle to create high-value products for global markets.

Without competitive exports, dollar earnings remain limited.

Experts suggest that both government and private companies must significantly increase investment in innovation, universities, and scientific research to remain competitive in the AI era.

 Weak Manufacturing Limits Export Growth

India’s manufacturing sector continues to lag behind several global competitors.

Although initiatives such as “Make in India” were launched to boost industrial production, many economists believe the results have not matched expectations.

A large share of new businesses and startups are concentrated in service-based sectors such as e-commerce, delivery platforms, and digital applications.

While these industries generate employment and convenience, they contribute less to foreign exchange earnings than large-scale manufacturing.

Countries earn substantial dollars by producing and exporting goods to global markets—from consumer electronics to advanced machinery and aerospace components.

Experts believe India should begin skill development at school and college levels, focusing on electronics, textiles, engineering, and manufacturing-related industries.

Stronger collaboration between government and industry could also help build world-class manufacturing infrastructure.

 India Imports More Than It Exports

A major challenge remains India’s trade imbalance.

During 2025-26, India exported goods worth approximately $860 billion but imported products worth around $979 billion. This resulted in a trade deficit of nearly $119 billion.

India’s major exports include petroleum products, jewellery, and pharmaceuticals.

However, these sectors often generate lower profit margins compared to industries such as electronics, machinery, semiconductors, and automotive components.

Countries like China, Vietnam, and Taiwan have built strong export ecosystems in these high-value sectors, giving them a competitive advantage.

Economists argue that India must strengthen export-oriented policies, improve industrial competitiveness, and support businesses targeting global markets.

Logistics Challenges Continue to Hurt Competitiveness

India also faces infrastructure and logistics bottlenecks.

The country currently ranks 38th in the World Bank’s Logistics Performance Index.

Although significant progress has been made through new highways, ports, and digitised customs systems, transportation connectivity in many rural and Tier-2 regions still requires improvement.

To address these issues, the government has launched two Dedicated Freight Corridors and is developing three more.

These projects are expected to reduce transportation delays and improve export efficiency in the coming years.

How Is the RBI Responding?

The Reserve Bank of India (RBI) is actively intervening to limit excessive volatility in the currency market.

Whenever the rupee comes under pressure, the central bank sells dollars from its foreign exchange reserves.

This increases the availability of dollars in the market and helps stabilise the exchange rate.

During 2025-26, the RBI sold around $53.1 billion, approximately $12 billion more than the previous financial year.

On May 21, 2026, the central bank reportedly sold at least $2 billion, followed by another $5 billion on May 26 to support the rupee.

Professor Arun Kumar believes timely intervention is essential because sharp currency declines encourage speculation and can discourage investment and production.

Dr Sharad Kohli adds that the RBI appeared determined to prevent the rupee from crossing the ₹97 mark, considering the psychological and political significance attached to currency movements.

Falling Reserves But Still Comfortable

The RBI’s interventions have reduced India’s foreign exchange reserves.

According to figures released on May 22, reserves declined to approximately $681.4 billion from more than $688.8 billion a week earlier.

Despite the decline, these reserves remain sufficient to cover around ten months of imports, indicating that India still maintains a comfortable external position.

Could the Rupee Reach ₹100 Per Dollar?

Economists remain divided on this question.

Economist and Chairman of the 16th Finance Commission, Arvind Panagariya, has argued that allowing the rupee to gradually move toward ₹100 per dollar may be a practical adjustment.

In his view, 100 is simply another exchange rate level, no different from 99 or 101.

However, economist Jayati Ghosh disagrees. She warns that a weaker rupee would make imports such as crude oil, gold, and several essential commodities more expensive, increasing inflationary pressure on consumers.

She also argues that the old assumption that a weaker currency automatically boosts exports no longer applies as strongly to India because the country remains heavily dependent on imports.

Dr Sharad Kohli believes the rupee’s future direction will depend on several key factors:

• The trajectory of global oil prices.
• The return of foreign investors.
• Remittances sent by NRIs.
• The RBI’s willingness to continue selling dollars.
• Global demand for the US dollar.

Until these factors improve, pressure on the Indian currency is likely to remain, making the path toward ₹100 per dollar a possibility that cannot be ruled out.