Economic Survey 2025-26 highlights rupee instability due to trade deficit and FPI dependence

Indian Express - Explained · 16 Feb 2026 · 2 min read
Prelims · Economy Mains · GS3 Economy High relevance

The Economic Survey 2025-26 identifies India's goods trade deficit and reliance on foreign portfolio investments (FPIs) as key factors undermining rupee stability, despite strong economic fundamentals and services export growth.

Key points

Rupee depreciation hit a record low of Rs 91.98 per US dollar, driven by FPI outflows of $11.8 billion in 2025, including $4 billion in January alone.

Trade deficit in goods persists despite net surpluses in services and remittances, creating dependence on volatile foreign capital flows for balance of payments stability.

[GS3-Economy] The Survey notes rupee undervaluation partially offsets US tariff impacts (50% on some goods) but warns of investor reluctance due to currency volatility.

Manufacturing exports grew at only 6.4% CAGR since 2020 versus 9.4% for services, with the latter unable to drive institutional reforms or provide durable currency stability.

FPI outflows reflect global risk-off sentiment, US bond yields, and underperformance of Indian equities, particularly in IT and healthcare sectors.

DIIs (Domestic Institutional Investors) counterbalanced FPI volatility, increasing ownership to 18.7% of NSE-listed equities by September 2025.

The Survey links currency stability to manufacturing competitiveness, citing India-EU FTA as strategic opportunity to strengthen export resilience.

[GS2-Governance] IT-Enabled Services' limited pressure for institutional reform contrasts with manufacturing's capacity to impose hard fiscal/logistical constraints on state capacity.

Way Forward: India should accelerate manufacturing ecosystem development through trade agreements, incentivize export-oriented production, and deepen domestic capital markets to reduce FPI dependence.

Key terms

Foreign Portfolio Investments (FPIs)

Investments by foreign entities in Indian financial assets like equities and bonds, regulated by SEBI. Critical for UPSC as they impact balance of payments, currency stability, and are sensitive to global risk sentiment and domestic policy certainty.

Trade Deficit

When a country's imports exceed exports in value. For India, persistent goods trade deficit (offset partially by services surplus) creates current account vulnerability, a recurring theme in GS3 economy and international trade discussions.

Domestic Institutional Investors (DIIs)

Indian entities like mutual funds and insurance companies investing in domestic markets. Their growing role (18.7% of NSE ownership) is crucial for financial stability, reducing external vulnerability, and deepening capital markets - key for GS3's financial market topics.

Currency Undervaluation

When a currency trades below its purchasing power parity. The Survey notes rupee's undervaluation mitigates US tariff impacts but deters investment, linking to GS3's exchange rate management and trade policy debates.