We can’t rely on capital inflows for rupee stability anymore: India’s economic model needs to change

India presents a macroeconomic paradox today. GDP growth is among the fastest in the world, inflation is nearly zero and the fiscal deficit is in check. Yet the Indian rupee is Asia’s worst-performing currency.

Foreign portfolio investors have pulled out $17 billion and net foreign direct investment (FDI) all but evaporated in 2024-25. What explains this disconnect? A careful examination reveals an uncomfortable truth: strong domestic fundamentals alone no longer guarantee external confidence. Recall that India is possibly the only large developing Asian economy that has run a consistent trade deficit for decades.

Unlike China, Japan, Korea or most Asean peers, India imports more than it exports, particularly energy, electronics, gold and machinery. Textbook economics would treat this as a structural vulnerability. Yet for more than 30 years, India turned it into a strength, powered by foreign investor faith in its long-term trajectory.

Despite chronic trade deficits, India has attracted nearly $1 trillion in FDI since the early 1990s. Our reserves of foreign exchange are among the world’s largest. Global investors have been betting big on our growth prospects, investing in projects or buying stakes in high value companies, enthused by a supportive policy environment, a predictable democracy with strong institutions and an economy capable of delivering sustained high returns.

This is now changing. Net FDI fell from some $40 billion in 2020-21 to about $350 million last year. Two reasons explain this reversal.