Rupee weakness driven by global flows, not domestic fundamentals: CEA

India’s Chief Economic Adviser V Anantha Nageswaran has said the recent weakness in the rupee reflects global capital flow distortions rather than domestic economic fragility, even as the currency remained under pressure near record low levels against the US dollar.

The rupee traded around 95.40 per dollar

in market action on Tuesday (May 5), staying close to its all-time low, amid elevated crude oil prices, geopolitical tensions in the Gulf and sustained demand for the US currency.

In his assessment, Nageswaran said the rupee’s current level is influenced by a global investment environment marked by strong capital concentration in the United States, particularly linked to the artificial intelligence-driven investment cycle.

He added that India continues to display strong macroeconomic fundamentals on parameters such as growth, inflation management, fiscal position and external stability, but said these have not been fully reflected in exchange rate movements.

Nageswaran described a “paradox” in which India’s macroeconomic indicators remain broadly stable, while the rupee has depreciated significantly over the past two years.

He noted that the currency has fallen more than 13% against the US dollar over that period and over 15% since January 2023.

He attributed part of the divergence to global capital allocation trends, where investors have increasingly channelled funds into US markets, supported by technology and AI-related growth themes.

This, he said, has reduced relative inflows into emerging markets.

According to Nageswaran, exchange rate movements are currently reflecting these external flow dynamics more than domestic fundamentals.

The remarks come at a time when the rupee continues to face pressure from higher global oil prices, which have increased India’s import bill and sustained dollar demand from energy-related payments. Brent crude has remained elevated following geopolitical tensions in the Middle East, adding to volatility in currency markets.

Foreign exchange traders have also pointed to steady dollar demand from importers and cautious hedging behaviour by exporters as additional factors contributing to pressure on the rupee.