India's Economy Soars 8.2% But Rupee Plummets to ₹90/$! Unpacking the Shocking Investor Dilemma

India's Economy Soars, But Rupee Hits Record Lows: A Complex Investor Scenario

India's economy showed robust growth, with its Gross Domestic Product (GDP) expanding by 8.2% year-on-year in the September quarter of 2025. Despite this strong performance, the Indian Rupee has weakened significantly, crossing the critical psychological barrier of ₹90 against the US dollar for the first time, presenting a complex economic scenario for investors.

Economic Performance vs. Currency Strength

• India's GDP registered a strong 8.2% growth in the September 2025 quarter, indicating a healthy expansion in economic activity.
• Simultaneously, the Indian Rupee has depreciated to new lows, with the USD/INR exchange rate surpassing ₹90 to a dollar.
• This situation underscores the principle that economic growth and currency strength are influenced by distinct global and domestic factors.

The "Boom with Depreciation" Phenomenon

• The article refers to the "Exchange Rate Disconnect Puzzle" and the "boom with depreciation" phenomenon observed in emerging markets.
• Research suggests that currency depreciation can occur alongside strong output and investment, a pattern documented in recent studies.
• Robust growth often increases demand for imports (raw materials, energy), which inherently requires more foreign currency, potentially pressuring the domestic currency.

Foreign Investor Outflows Explained

• A key driver of rupee weakness is the sustained outflow of capital by Foreign Portfolio Investors (FPIs) throughout much of 2025.
• These outflows are attributed to global uncertainties, rising yields on US Treasury bonds, and concerns over trade tensions or "tariff wars."
• When global capital flows reverse, emerging market currencies often suffer even if their economies continue to grow.

The Yield Puzzle: Why Higher Rates Aren't Enough

• India's 10-year government bond yield stands at around 6.5%, significantly higher than the US 10-year Treasury yield of nearly 4%, creating an attractive yield spread of approximately 250 basis points.
• Conventionally, such a spread should attract yield-seeking foreign investors into Indian debt markets and equities.
• However, this nominal yield advantage is offset by the risk premium associated with India, which includes currency volatility and inflation unpredictability.
• For a dollar-based investor, even a modest depreciation of the rupee (e.g., 3-4% annually) can entirely negate the higher returns from Indian bonds, turning effective returns negative.

Domestic Investors Step In

• Despite significant FPI selling, the Indian stock market has remained resilient.
• This resilience is largely due to a structural shift: domestic mutual funds, powered by record inflows from Systematic Investment Plans (SIPs), have increased their ownership.
• According to NSE Market Pulse data (November 2025), FPI equity ownership has fallen to a 15-month low of 16.9%, while individual investors (directly and via MFs) now hold nearly 19% of the market—a two-decade high.

Recommendations for RBI

• The Reserve Bank of India (RBI) should allow this structural adjustment in market ownership to continue.
• It should focus on preventing sharp, disorderly volatility swings rather than defending specific psychological levels like ₹90 per dollar.
• The central bank should maintain liquidity and anchor expectations through clear, confidence-building communication.
• Monetary policy should prioritize inflation and growth, avoiding aggressive interventions, while structural reforms should tackle the root causes of rupee weakness.

Impact

• The depreciation of the rupee can lead to higher import costs for India, potentially fueling inflation and increasing the price of essential goods like oil and electronics.
• It makes Indian exports cheaper, which could boost certain sectors.
• For foreign investors, it raises concerns about capital preservation and the overall return on investment.
• The rise of domestic investors signifies a maturing market but also means increased sensitivity to domestic economic factors.
• Impact Rating: 7/10

Difficult Terms Explained

• Gross Domestic Product (GDP): The total monetary value of all the finished goods and services produced within a country's borders in a specific time period.
• Exchange Rate Disconnect Puzzle: An economic phenomenon where currency exchange rates do not align with fundamental economic indicators like growth, inflation, or interest rates.
• USD/INR: The currency pair representing the exchange rate between the United States Dollar (USD) and the Indian Rupee (INR).
• Emerging Markets: Countries undergoing rapid growth and industrialization, such as India, Brazil, and China.
• Foreign Portfolio Investors (FPIs): Investors from foreign countries who invest in a country's securities (stocks, bonds) without gaining control of the company.
• Yield Spread: The difference between the yields on two different debt instruments, often used to compare the relative attractiveness of investments.
• Basis Points: A unit of measure used in finance to denote the percentage change in a financial instrument. One basis point is equal to 0.01% (1/100th of a percent).
• Nominal Yield: The stated interest rate on a bond before taking inflation into account.
• Risk Premium: The additional return an investor expects to receive for holding a risky asset compared to a risk-free asset.
• Structural Factors: Underlying, long-term conditions or characteristics of an economy that influence its performance.
• Cyclical: Relating to or denoting business or other activities that follow a cyclical pattern.
• Systematic Investment Plan (SIP): A method of investing a fixed sum of money at regular intervals in a mutual fund scheme, typically on a monthly basis.