Rupee may appreciate as balance of payments outlook improves: RBI DG Gupta

Gupta said the current account deficit (CAD) is expected to narrow in the coming years, while the capital account could turn more favourable later this financial year and remain so.

“With the RBI remaining committed to ensuring orderly conditions in the foreign exchange market, and having the wherewithal to meet decades worth of CAD, or the net BOP deficit, the current market dynamics do not appear especially well-founded,” she said. “If anything, there seems to be a fair case for the rupee to not just stabilize but perhaps even appreciate from the current levels,” Gupta said.

India’s traditional strengths, including services exports and remittances, are expected to persist, while merchandise exports could benefit from new trade opportunities and recent free trade agreements, she said. Lower dependence on imported oil could also support the country’s external position.

On capital account, Gupta pointed to stretched valuations in other markets, strong domestic macroeconomic fundamentals, robust GDP growth, a gathering domestic investment cycle and healthy bank and corporate balance sheets as factors that could support inflows. Measures to attract capital, rising foreign direct investment and the eventual inclusion of Indian bonds in more global indices could also strengthen capital flows into India, she said.

For now, India has leveraged special capital flow measures implemented in June, resulting in a meaningful balance of payments surplus for the year, Gupta said. The rupee has depreciated 13.1% on a point-to-point basis between March 31, 2025 and September 16, 2026. Gupta said this cumulative depreciation could prove to be temporary.

She also highlighted that for India, the AI story is, in effect, an “unspent force”. “Just as India has leveraged the potential of digital innovation thus far, it will leverage the potential of AI equally well going forward, while avoiding the risks.”

On growth, Gupta said that the country is investing in skills and infrastructure, and in easing the way of doing business. “When you put all of these together, I do not see a reason why India will not continue to grow at 7% growth rate. In fact, if external conditions were conducive, we would have already reached 8%,” she said during a fireside chat at the event.

However, in her address, she did highlight about a disconnect between the real economy narrative and parts of the financial markets. Among the markets, she said that the bond market have performed well, both compared to its own past as well as in comparison to most other countries. The equity markets, on the other hand have not tracked the same optimism. She said this could be because of a relatively more promising AI-led story in certain other economies. “While the Indian equity market witnessed an exceptional run of its own, roughly from June 2022 to September 2024, some other economies are having a better run now.” “While it is hard to predict, how long it may take, but the longer the disconnect persists, the higher the odds that the course correction is on its way,” she added.