Living with a Weaker Rupee

Executive Summary

The rupee’s current weakness seems to be structural and raises questions about the RBI's ability to restore order.
Dollar policy rates have moved from near zero to around 3%, closing the gap that made rupee assets attractive.
Recent tax reversals have pulled in investor money, though most of it is locked in for 3-5 years.
IT services exports, which for years offset India's trade deficit, is losing that role as AI reshapes how global clients view their India operations.
FDI that used to sit unhedged in India is now routinely hedged, a more telling signal of sentiment than any single reserve or growth number.

The rupee had its roughest stretch in over a decade, sliding from around 90/$ to 96-97/$, one of Asia's worst-performing currencies this year. A widening current account deficit, FII outflows, high crude prices and narrowing rate differentials all pushed in the same direction, with the RBI drawing down reserves just to slow the fall. With hedging programs, borrowing costs and pricing decisions now resting on a weaker currency, the rupee’s fall is no longer just a trading desk problem for CFOs.

In this session, Manoj Goel, Managing Director & Head, Corporate FX Sales — India and the Indian Subcontinent, Citi, separated the fundamental of this year's slide from the noise. He examined how hedge ratios and tenor should shift with 92-97/$ as the new working range, and what CFOs ought to be doing to stress-test their balance sheets for a rupee that stays weak for longer.

The Rupee in Crisis

The rupee has depreciated, but the dollar Index has hovered around 99-100 for a while and hasn't strengthened much against other currencies. These signs point to a rupee-weakness problem, not a dollar-strength one.
Multiple shocks have hit in quick succession with no time to recover between them. Normally, the RBI gets a window to stabilise circumstances between shocks, but this hasn’t been the case this time.
Post Covid-19, India was the shining star story. However, with AI reshaping the narrative, global clients are focusing on maintenance instead of expansion, threatening IT services exports that traditionally helped offset the large trade deficit.
Capital flow behaviour has flipped. FDI used to be sticky, long term money. Today, however, it is being hedged, with FPI equity simultaneously leaving, signalling lack of investor confidence. The recent changes to withholding tax and long term capital gains rules have pulled some flows back, but the shift in investor behaviour remains a key factor.
Even people who still believe in the India growth story want to see dollar returns, not just rupee returns.
India’s cumulative, net balance of payments (BoP) position over the last 2 years comes to just $30 bn, or roughly $15 bn a year. This is a small fraction of the RBI's overall reserves ($700 bn), and thus has only limited ability to move the rupee.
RBI's headline reserve figure understates how much has been spent defending the rupee. Reserves fell from around $700 bn to $666-670 bn on paper, but the RBI has also built up a forward book in the range of $100 bn, with dollars already committed for future sales. These are unaccounted-for in the reported reserve figures. Netting that off, India’s true reserve position is closer to $550 bn, an effective loss of $150 bn, five times larger than the country’s ~$30 bn trade shortfall. The ~$120 bn difference points to capital outflows and speculative positioning rather than trade.

The real driver: dollar interest rates

The main difference between today and 2013, when the ‘Taper Tantrum’ hit, is dollar interest rates. Back then, the rupee carried a 7% rate advantage over a zero dollar rate. Now, the long term dollar rate view is closer to 3% and the dollar-rupee rate gap has compressed sharply, with money flowing back to the US for both debt and equity reasons.
This shows up in actual capital flows. For instance, companies that used to leave dividend money sitting in India because it earned more here are now repatriating capital every few weeks.
As long as dollar rates stay elevated, the rupee will remain under pressure. The one (highly unlikely) factor that may reverse this is if dollar rates head back toward zero.
In terms of inflation, India’s current core CPI of ~3% does not reflect real world cost increases, such as on healthcare, education and rent. Companies are stuck because client contracts benchmark against the official low number while actual costs and wage expectations run closer to 5%, compressing margins.

What RBI and government have done so far

The government pulled in an estimated $60-80 bn this year through NRI deposit schemes and by reversing its former stance on withholding tax and long term capital gains for offshore investors. This serves as a major signal of intent.
Most of this money has a 3-5 year tenor, which will buy time for India rather than solving the underlying problems. The downward pressure on the rupee has only been pushed down the road.
The RBI's headline $700 bn reserve number is part optics, designed to signal confidence to speculators, and part real. However a chunk of it is tied up in forward book commitments built up over past interventions, so the effective firepower in its hands is less than it might seem.
The RBI is in an unenviable position of simultaneously managing currency and systemic liquidity. Given how large these capital inflows are, this further complicates the forward book math.

Hedging strategy takeaways

Finance leaders should move away from the mindset that the RBI will manage the currency on their behalf. India is a large economy, not a small emerging market and the currency can move around a lot.
Plain vanilla forwards lock companies into a fixed rate for 100% of their exposure regardless of how the currency subsequently moves. If the rupee moves in a company's favour after hedging, it remains stuck at the locked rate. Structured alternatives work differently. The hedge ratio automatically reduces as the currency moves favourably, a larger share of exposure stays open to participate in that move while downside protection remains intact.
Companies should watch out for contracts with inflation-linked repricing clauses. Many only hold up to 5-6% currency movement before renegotiation kicks in. Tail risks beyond that will need separate coverage.
Back-testing is highly sensitive to the starting point chosen. A key input is board risk appetite, and how much currency movement the underlying business can absorb.
Options are still considered underpriced in India solely because adoption is low. This makes them a relatively cheap way to buy tail risk protection.
Invoicing in INR is ideal where possible since it removes currency risk entirely, but if a trading partner isn't comfortable in INR, forcing it usually isn't worth the friction.