The Rupee’s Best Defence Is Reform, Not Reserves

The rupee's slide is the market verdict on policy choices. Targeted reforms can encourage inflows, compress import demand, and restore the currency without burning reserves.

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The rupee closed at 95.69 to the dollar last Friday after coming close to breaching 97 earlier in the week. It is down 5% since the war in West Asia began in late February. The Reserve Bank of India has been working overtime to slow that decline. In FY26, the central bank sold $195 billion of foreign currency on a gross basis and $53 billion on a net basis. In March 2026 alone, gross sales touched $29.6 billion, the highest in thirteen months. This is reserve defence on an industrial scale, and it is an incomplete approach.

The rupee is weakening because three flows have turned the wrong way. Foreign capital is exiting. The crude oil import bill, at $134.7 billion in FY26, grows with every internal combustion vehicle sold today. Gold imports hit a record $72 billion in the same year, even as Indian households already hold somewhere between 25,000 and 34,600 tonnes of gold, valued at $3.8 trillion or close to 90% of India’s GDP.

In our earlier writing on the Great Rebalancing, we argued that services exports would deliver the surplus that closes India’s external account. That side of the equation is performing. The matching reforms on the capital and import side have been left undone. Three urgent reforms will close that gap. 
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Stop Taxing The Capital India Needs

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Foreign capital is voting with its feet, and India’s tax architecture is the primary reason. The reversal can be triggered by a single instrument.

Foreign Portfolio Investors pulled $13.6 billion out of Indian financial assets in March 2026, followed by $7.56 billion in April and $2.62 billion in May so far. The capital account is also leaking from the FDI side. Gross FDI into India hit a record $94.5 billion in FY26, but net FDI was only $7.65 billion. Repatriations by foreign firms reached $53.6 billion, and overseas FDI by Indian companies added another $33.3 billion. The country is welcoming dollars at the front door and watching almost as many leave by the back.

The fundamental reason is a tax architecture out of sync with the rest of the large economies. Capital gains taxation on FPIs has been a source of dispute and exit anxiety for over a decade. Retrospective interpretations, indirect transfer provisions, unpredictable rug-pulls and reversals from inconsistent bureaucrats, inconsistent principles of taxation on debt that deviates from other jurisdictions, and the layered distinctions on listed equity have combined to make India a higher-friction destination. Reform requires the installation of a clean, time-bound window of consistent boundary conditions and a firm indication that there will be no surprises within that timeframe.

The proposal is direct. Waive capital gains tax on new investments by all registered Foreign Portfolio Investors for the next five years. Extend the benefit beyond that window for positions taken during it, until they are sold. Apply the same treatment to sale proceeds reinvested in Indian markets within the window.

The arithmetic is straightforward. The forgone revenue is zero on capital that is currently absent. Even a $20 billion swing in net FPI flows would meaningfully alter the rupee’s trajectory. February proved the market’s responsiveness. After the interim India-US trade deal eliminated the penal 25% tariff and reduced the reciprocal tariff to 18%, FPIs net-bought $4.17 billion in a single month. Capital responds to clear, time-bound signals.

Critics will call this a giveaway to foreign capital. The honest framing is that India is choosing between collecting tax on capital that has already left and welcoming capital that decides to stay. India requires consistent net FDI on its path to a $10 trillion GDP, and the highway for global capital must be unblocked immediately.

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Accelerate India’s Transition Past Peak Oil With Buses First

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India’s crude oil import bill is the largest single line on the import ledger. As we have argued before, the path past peak oil is not primarily a climate story for India. It is a currency story. The faster India crosses it, the faster the rupee achieves a structural floor.

The numbers set the scale. India spent $130 billion on net crude oil imports in FY26 and imports 88% of its crude oil needs. Every internal combustion vehicle sold today locks in dollar-denominated fuel demand for the next fifteen years. The current account remains structurally exposed to West Asia, OPEC decisions, and Russian discount cycles. None of those variables are within India’s control. The vehicle fleet we incentivise is.

The institutional precedent already exists. Indian Railways has electrified 99.2% of its broad-gauge network as of November 2025, with fourteen zones and twenty-five states and union territories at 100%. The country moved from 24% electrification in 2000 to 99% in 25 years, and 46,900 route kilometres were electrified in just the past decade. The Ministry of Railways, under Ashwini Vaishnav, has demonstrated that modal electrification at national scale is something India has can solve.

The proposal is to do for road transport what has been done for the railways. A central scheme of ₹1,00,000 crore over five years must incentive a migration of all new buses to EVs. India’s combined public and private bus fleet stands at roughly 1.8 million vehicles, with a massive upgrade cycle underway. A new-gen bus fleet can be electrified within 5 years. India is already seeing 35-50% of new two-wheeler sales transition to EV. We can migrate new bus sales to EV to the same levels over a decade.

The scale is the point. The existing PM E-DRIVE scheme has an outlay of ₹10,900 crore. The PM-eBus Sewa programme only targets 38,000 electric buses by FY29. These programmes are calibrated for gradual displacement. They will not move the oil import bill in the timeframe the rupee requires. A ₹1,00,000 crore programme is roughly nine times the existing PM E-DRIVE budget, and it is sized to the problem the rupee is signalling. The manufacturing dividend follows automatically. Every EV bus, two-wheeler, or truck shifts demand from a dollar-priced commodity to a rupee-priced industrial base in cell manufacturing, battery assembly, and component supply.

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Unlock The World’s Largest Gold Reserve Held By Indian Citizens

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India spent a record $72 billion importing 721 tonnes of gold in FY26. The country’s households already hold somewhere between 25,000 and 34,600 tonnes of gold, valued at $3.8 trillion. That is the largest concentration of private gold anywhere in the world. It exceeds the combined reserves of the top ten central banks. The policy task is not to suppress imports through tariffs. It is to unlock the supply that already sits inside the country.

The tariff approach has been tested. The Union government reduced the gold import duty from 15% to 6% in the July 2024 Budget. The expectation was that lower duties would reduce smuggling and route imports through the formal channel. Imports still rose to a record $72 billion. Volumes actually fell by 4.76% year-on-year, but the import value rose 24% because international prices surged. Tariffs fail to control imports when prices are doing the driving. They mostly redistribute trade between formal and informal channels, and in the recent case, between domestic refiners and routed-through-Dubai arbitrageurs operating under the India-UAE CEPA quota.

The reform is to attack the supply problem at its root. Abolish capital gains tax on the sale of gold by resident Indians for a 12-month window. Households and family holders sitting on non-yielding gold will release some portion of it into the formal market. The grey market shrinks. The household balance sheet liquidates a static asset into productive deployment. Domestic supply meets domestic demand without crossing a customs gate.

The arithmetic is conservative. If 200 additional tonnes are released into the formal market over the year, India avoids approximately $30 billion of imports at current gold prices of roughly $145,000 per kilogram. That alone is more than four times the net FDI inflow over FY26.

Critics will worry about a gold price crash from a large domestic supply release. The volumes involved, even at the upper end of the estimate, are a fraction of global daily gold flows. The domestic price effect will be modest. The currency effect, working through import substitution, will be material. 

The Prime Minister has already publicly asked citizens to delay non-essential gold purchases. The capital gains waiver is an institutional mechanism that converts that appeal into a measurable outcome.

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Hesitation Will Cost Us In Years

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The rupee is the price at which India’s capital, energy, and savings choices settle against the world. Each of the three reforms attacks one of those settlement points directly. Together, they shift India from defending the currency with $53 billion of net reserve sales to defending it with structural policy that has more positive feedback effects.

The Great Rebalancing argument we have made before required services exports to cover India’s merchandise deficit. Services have done their part. India has posted a services trade surplus of $214 billion in FY26. The matching reforms on the capital, oil, and gold sides are what directs that services strength towards a stable currency and, in time, a structurally appreciating one.

India is not in crisis. It has the policy tools to convert a moment of currency pressure into a structural acceleration. The cost of bureaucratic hesitation will not be measured in basis points or social media engagement. It will be measured in years of forgone growth, in EV scale we did not build, in capital we did not attract, and in domestic savings we did not unlock. 

The rupee does not need a bailout. It needs urgent and obvious reforms. India has the institutional capacity to deliver them. What India needs is the decision to act on all fronts at once.

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