Rupee puzzle: Why the currency’s exchange rate is not justified by India's economic fundamentals

Subscribe to enjoy similar stories.There is a discomforting paradox at the heart of India’s current macroeconomic situation. By almost every conventional measure of sovereign economic health—growth, inflation, fiscal trajectory, external vulnerability and investor confidence in the real economy—India’s fundamentals are among the strongest of any large emerging market. Yet the rupee has depreciated by over 13% against the dollar in the past two years and by more than 15% since January 2023.

If exchange rates are verdicts on fundamentals, India appears to have received an unjust one.Consider what the scoreboard actually shows. India’s real GDP growth has remained the fastest among major economies, running well above 6% annually even in a difficult global environment. Inflation has stayed moderate and within the Reserve Bank of India’s tolerance band.

The current account deficit has been contained at low levels relative to GDP. External debt as a share of GDP remains among the lowest in the emerging market universe, insulating India from the rollover vulnerabilities that typically trigger currency crises. The Union government has been on a credible fiscal consolidation path.

And three sovereign rating upgrades in this period reflect precisely the kind of institutional confidence that should, in any textbook world, be supporting the currency.Something else has been going on, and understanding it requires looking beyond India’s borders.The Korean won offers a clarifying parallel. South Korea runs a structural current account surplus—it earns more foreign exchange from the rest of the world than it spends by any conventional measure—which should provide a durable floor under the won. Yet the won depreciated by more than 17%