Why India’s Rupee is Weakening: The Real Problem is Slowing Foreign Investment, Not Just Trade Deficit

Explore why the Indian rupee is depreciating due to capital account challenges. Learn how declining foreign investment matters more than trade deficits for India’s currency and economy.

Understanding the Rupee’s Weakness: It Is Not What Most People Think

The Indian rupee has lost about 5 percent of its value in 2025, crossing the psychologically important 90 mark against the US dollar. When you watch news coverage about this, you will hear a lot of talk about India’s trade deficit. India imports more goods than it exports, and this trade deficit is often blamed for the rupee’s weakness. But this explanation misses the real story.​

The actual problem is far more serious. The rupee is weakening because foreign investors who previously poured money into India are now pulling their funds out at an alarming rate. This is a capital account crisis, and it matters much more for your currency than whether India buys more goods from abroad than it sells.

Think of it this way. A trade deficit is like spending more money on shopping than you earn from your salary. A capital account problem is like everyone withdrawing their savings from your bank at the same time. The second problem is far more urgent and dangerous.

The Foreign Investment Cliff: What Happened in 2025

The numbers tell a shocking story. Foreign Portfolio Investors have withdrawn a record 1.55 lakh crore rupees (about 17.7 billion US dollars) from Indian stock markets in 2025 alone. This is money that foreign investors previously put into Indian companies and stocks. Now they want it out.​

In fiscal year 2024-25, the situation was even worse. Foreign Direct Investment, which includes money that foreign companies invest in Indian factories and businesses, crashed by 96.5 percent. It fell from 10 billion US dollars to just 353 million US dollars. This is a record low. Despite high gross inflows of FDI reaching 81.04 billion US dollars, the actual net amount coming into the country dropped sharply because of massive outflows and investors taking their profits and leaving.​

Between July and September 2025, foreign investors pulled out 76,000 crore rupees in just three months. This was not because India suddenly became a bad place to invest. It was because of specific factors like uncertainty over the US-India trade deal, high US tariffs on Indian goods, and attractive investment opportunities available elsewhere in the world.

Why Capital Flows Matter More Than Trade Deficits

To understand why foreign investment is more important than trade deficits, you need to know how a country’s balance of payments works. Every country has two main accounts: the current account and the capital account.​

The current account measures buying and selling of goods and services. When India imports more goods than it exports, this shows up as a current account deficit. India imports about 90 percent of its crude oil, it buys expensive electronics and machinery from abroad, and it purchases more than it sells in goods. This trade deficit has existed for many years and is actually quite manageable for the Indian economy.​

The capital account measures flows of money for investment purposes. This includes Foreign Direct Investment and Foreign Portfolio Investment. It also includes loans and borrowing from other countries. When more money comes in for investment than goes out, this is a capital account surplus. When more money goes out than comes in, this is a capital account deficit.​

Here is the critical point that most people miss. By definition, these two accounts must balance each other. When you have a current account deficit, it must be offset by a capital account surplus. This is how the mathematics of balance of payments works. India has had a current account deficit for years, but previously, a strong capital account surplus covered it completely.​

In Q3 FY25, India’s capital account recorded a deficit of 2.7 percent of GDP, or 26.8 billion US dollars. This was the widest capital account deficit ever recorded. At the same time, the current account deficit narrowed to just 1.1 percent of GDP. The result was that India’s overall balance of payments swung from a healthy surplus to a concerning deficit of 3.8 percent of GDP.​

This is the problem. The capital account has flipped from surplus to deficit. Foreign money is no longer coming in to offset trade deficits. Instead, foreign money is leaving.

Capital Outflows and the Rupee: A Quick Breakdown

Below is a short table that captures why the rupee is under pressure and why capital flows matter more than the trade deficit.

Factor	What’s Happening	Why It Matters
FPI Outflows	Record withdrawals of more than 1.5 lakh crore rupees in 2025	Selling pressure reduces dollar supply and weakens the rupee
FDI Slowdown	Net FDI collapsed as investors repatriated profits	Long-term confidence drops when committed capital leaves
Capital Account Deficit	Turned negative at 2.7% of GDP	No surplus left to cover the current account gap
Global Conditions	High US rates and strong dollar pull money out	Investors prefer safer, higher-yield markets
Policy Uncertainty	Delays in the US-India trade deal, high US tariffs	Raises risk perception and triggers exits

In short, the rupee is sliding because investment money is leaving faster than it arrives. The trade deficit hasn’t changed much, but the capital account has flipped, and that shift explains most of the pressure on the currency.

What Changed: Why Are Foreign Investors Leaving

Several specific factors explain why foreign investors have become so negative about India in 2025.

The most immediate trigger is currency concern. The rupee’s depreciation itself creates a vicious cycle. When the rupee weakens, foreign investors who hold Indian assets see the value of those assets decline in their own currency. If you bought stocks worth 100 dollars when the rupee was 85 to the dollar, and now the rupee is 90 to the dollar, your investment is suddenly worth less in dollar terms. Foreign investors respond by selling and taking their money out. This causes the rupee to weaken further, which triggers more selling.​

The US tariff situation has spooked investors. The Trump administration imposed 50 percent tariffs on Indian goods. This directly threatens India’s exports to the United States, which amount to 87 billion US dollars annually. Analysts estimate that these tariffs could reduce India’s GDP growth by 0.6 to 0.8 percent if they remain in place for a full year. When investors hear that India’s growth might slow, they become less interested in investing.​

The India-US trade deal has been delayed and remains uncertain. This uncertainty makes foreign investors hesitant. They prefer clarity and predictability. Delays and uncertainty push them to look for opportunities in other countries like China and Southeast Asia, where the business environment might seem clearer.​

Global interest rates also play a role. The US Federal Reserve has kept interest rates relatively high compared to previous years. This makes US government bonds and other dollar-denominated assets more attractive to foreign investors. They can earn more money by keeping their funds in the United States than by investing in Indian stocks.​

Finally, there has been a rotation effect. Foreign investors are actively moving money from India to other Asian markets perceived as offering better value. China’s stocks are cheaper relative to their earnings. Some Southeast Asian countries are offering better returns. India’s stock market indices have underperformed regional peers even as volatility has increased.​

The Real Impact on India’s Economy

This capital account crisis has real consequences that go beyond just currency movements.

First, the weakening rupee makes imports more expensive. India imports most of its oil, and oil bills increase when the rupee falls. This leads to imported inflation. Edible oils, electronics, machinery, and fertilizers all become more expensive. This pushes up prices for consumers.​

Second, the government’s subsidy bill increases. India subsidizes fertilizer prices to help farmers. When fertilizer imports become more expensive due to rupee weakness, the government must spend more money on subsidies.​

Third, companies with dollar debt face problems. Many Indian firms borrowed money in US dollars. When the rupee weakens, the rupee value of their dollar debt increases. A company that borrowed 10 million US dollars when the rupee was at 80 now faces a much larger rupee burden. About 65.5 billion US dollars of external commercial borrowing by Indian firms is unhedged, meaning these companies are not protected against rupee movements. This creates financial stress.​

Why the Current Account Deficit Is Actually Not the Main Problem

Here is something important that contradicts conventional wisdom. India’s current account deficit of 1.1 to 1.3 percent of GDP is actually quite manageable and not the primary cause of rupee weakness.​

India’s large services sector exports, worth about 50 to 51 billion US dollars in recent quarters, partially offset the goods trade deficit. More importantly, remittances from Indians working abroad hit a record high of 123 billion US dollars in fiscal year 2024-25. This secondary income helps to narrow the current account deficit significantly.​

Many developing countries have current account deficits. It is not unusual or inherently problematic. What matters is whether a country can finance this deficit with foreign investment. For years, India did exactly that. Strong FDI and FPI inflows easily covered the current account deficit.

The real problem started only when the capital account turned negative. Suddenly, there is no longer enough foreign money coming in to cover the trade deficit. This forces the central bank to use its foreign currency reserves to balance the books. In November 2024 alone, the RBI sold 20.23 billion US dollars in the foreign exchange market to try to prevent rupee depreciation. This is the highest monthly intervention since 2000. But the RBI’s reserves are finite, and if outflows continue, eventually reserves will decline significantly.​

The Difference Between Trade Deficits and Capital Problems

Imagine a household analogy. A family can run a trade deficit by spending more on groceries and utilities than the father earns. This is fine if the mother has a well-paid job and her income more than makes up for it. The household remains healthy.

But if the mother loses her job, suddenly the household cannot afford the trade deficit anymore. The family must either cut spending or use savings. This is what is happening to India. The country had a manageable trade deficit financed by capital inflows. Now capital inflows have reversed, and India must either reduce imports or burn foreign reserves.

Trends in Foreign Investment: The Slowdown Explained

Gross FDI inflows remain healthy at 81.04 billion US dollars in fiscal year 2024-25, a 14 percent increase from the previous year. This might suggest that India is still attractive. But gross inflows are misleading because they hide the real problem in net flows.​

Foreign investors are not just stopping new investments. They are actively exiting old investments. They are selling shares of companies like Swiggy and Hyundai to take profits. They are repatriating money. Alpha Wave Global and Partners Group exited major shareholdings. Singtel sold its stake in Airtel. BAT divested from ITC.​

A report by the Indian Venture Capital and Alternate Investment Association found that private equity and venture capital exits totaled 26.7 billion US dollars in 2025, a 7 percent increase from the previous year. Investors are using profitable IPOs as exit opportunities to take their money home.​

This tells an important story. The IPO market has been hot, with companies like Hyundai and Swiggy listing at high valuations. This allowed early investors to realize huge gains and exit. But exit is the opposite of commitment. It means foreign investors who made money are now taking it away.​

Where Will This Lead Us

If the capital account deficit persists, India will face several challenges. The rupee could weaken further. Inflation could increase due to expensive imports. The RBI might need to raise interest rates to attract foreign investment and defend the currency. Higher rates would slow economic growth.

Some economists argue that a moderate amount of rupee depreciation is actually healthy. It makes Indian exports cheaper and more competitive. It encourages tourists to visit India. However, sharp depreciation like what we are seeing creates financial instability. Companies with unhedged dollar debt suffer. Inflation rises. The benefits of cheaper exports are outweighed by the pain of expensive imports and financial stress.

The Main Takeaway: It Is All About Foreign Investment

The fundamental issue facing India in 2025 is not the trade deficit. Countries have managed trade deficits for decades. The problem is that foreign investment, which previously financed this trade deficit, has slowed dramatically and even reversed.​

This slowdown is driven by specific factors: trade policy uncertainty, global interest rates, currency weakness creating a vicious cycle, and investors finding better opportunities elsewhere. These factors are cyclical. They can change. When the India-US trade deal is resolved, when global interest rates decline, when growth expectations improve, foreign investors will return. The outflows may prove temporary.​

But right now, the capital account crisis is the main challenge. The rupee is weakening primarily because the capital account has turned negative, not because India’s trade deficit has worsened. Understanding this distinction is crucial for policymakers and investors. It means that the solutions must focus on attracting foreign investment and building confidence, not on reducing imports through trade barriers or other protectionist measures.

The real issue is the slowdown in foreign investment coming into India. This is what matters for the rupee and for India’s economic stability. Until this trend reverses, expect continued pressure on the currency.

Conclusion

India’s currency troubles in 2025 have less to do with what it buys from the world and far more to do with the money leaving its financial markets. The trade deficit hasn’t suddenly become unmanageable. What has changed is the steady flow of foreign investment that once covered it. With portfolio investors selling in record amounts and net FDI collapsing, the cushion that supported the rupee has weakened. A soft currency then feeds its own decline by making foreign investors even more cautious.

This is why the focus needs to shift. The priority is rebuilding confidence, resolving trade policy uncertainty, and creating conditions that draw long-term capital back into the country. If India can stabilize investor sentiment, the pressure on the rupee will ease, inflation risks will fall, and the economy will regain balance. The path forward isn’t about cutting imports. It’s about restoring the capital flows that keep the system stable.

Source: Rupee’s fall: What it means for you and what you can do to de-risk & FPI selling continues: Rs 11,820 crore offloaded in December first week; total 2025 outflow touches Rs 1.55 lakh crore

Read Also: Why the Indian Rupee Has Fallen Past 90 Per Dollar: A Simple Explanation & India’s Debt Problem: Can Careful Spending Prevent Trouble?