Key Takeaways:
India's rupee breached 100 to the US dollar for the first time as a confluence of foreign capital flight, weakening economic fundamentals, and the Iran war's impact on energy costs erased the country's post-pandemic gains and pushed it to sixth place among the world's largest economies.
"The Modi government's handling of the economy has hit a low with no guarantee that it cannot go lower," said Surjit Bhalla, a former member of the prime minister's Economic Advisory Council, writing in the Indian Express.
The rupee has lost 11% of its value against the dollar over the past 12 months, making it one of Asia's worst-performing currencies in 2025. Foreign investors have pulled more than $23 billion from Indian equities since the start of the year, while net foreign direct investment in the fiscal year that ended March 31 totaled just $7.7 billion — a 72% decline from $28 billion three years earlier. The stock market has fallen to seventh place in global market capitalization rankings, overtaken by South Korea and Taiwan on the back of technology stock gains.
The economic deterioration threatens to undermine Prime Minister Narendra Modi's signature promise of modernizing India's economy. The International Monetary Fund now projects India's per capita income at market exchange rates will fall to $2,812 this year, behind Bangladesh's $2,911. India has dropped from fourth to sixth place among the world's largest economies, behind the UK, after officials had touted an IMF forecast last year that the country was on the cusp of overtaking Japan.
The proximate trigger is the war in Iran, which has driven up fuel and fertilizer prices for the world's third-largest oil consumer. India imports 85% to 90% of its crude, with more than half historically passing through the Strait of Hormuz. The conflict also threatens remittances from nearly 10 million Indian workers in the six Gulf Cooperation Council states.
But the structural problems predate the conflict. A 2015 amendment to India's model Bilateral Investment Treaty forced foreign investors to exhaust remedies in India's notoriously slow courts for five years before seeking international arbitration. The reintroduction of a capital-gains tax on listed equities in 2018 — with rates raised in 2024 — further deterred inflows. Between 2017 and 2024, the government passed about 700 "quality control orders" that imposed burdensome licensing requirements on imports.
Tesla last month abandoned plans to build a factory in India, a high-profile reversal after the Modi government had publicly courted the US electric-vehicle maker. The company's decision mirrors broader corporate hesitation: business leaders privately complain about bureaucratic heavy-handedness, aggressive tax inspectors, and regulatory red tape, according to people familiar with their views who declined to be named for fear of government retaliation.
The last time India faced a comparable currency crisis was in 2013, when the rupee fell to 68.83 to the dollar during the "taper tantrum," prompting the Reserve Bank of India to tighten liquidity and the government to curb gold imports. The current slide has already surpassed that episode by more than 45%, with no equivalent policy response beyond Modi's public appeal for Indians to reduce gold imports and foreign travel to conserve foreign exchange.
Turning the economy around would require a fundamental shift in approach, economists say. Instead of assuming that global capital will naturally flow to India, the government needs to emulate countries such as Vietnam that have focused on improving their business environment. A less confrontational tax regime, streamlined investment treaty terms, and reduced licensing requirements could help reverse the outflow trend — but no such reforms are currently on the agenda.
This article is for informational purposes only and does not constitute investment advice.
