Sultans of Swing?

For Australian investors in Indian equities, the currency matters as much as the companies: returns depend not just on how Indian businesses perform, but on the rupee-Australian dollar rate when those returns come home. Over the past year, that’s been a headwind; the rupee fell to a record low against the US dollar and dropped around 17% against the Aussie, trimming Indian equity gains once converted back to AUD.

But a falling exchange rate doesn’t always mean a fundamentally weak currency. India’s slide reflects a strong US dollar, foreign outflows and a heavy oil import bill, but also a healthy adjustment from a rupee that had become expensive in real terms.

Over the past month, the Rupee has shown signs of fighting back – with a pickup of 4.8% vs AUD and 1.5% vs USD (23 May to June 23).

What Weakened the Rupee

Three forces drove much of the rupee’s weakness.

1. The US dollar remained resilient, supported by elevated US interest rates and expectations that monetary policy would remain restrictive for longer than previously anticipated. This continued to pressure emerging market currencies.
2. India’s oil import bill became a major headwind. With more than 85% of its crude oil needs imported, India is highly exposed to global oil prices. When oil rises, dollar demand increases, adding pressure on the rupee. Rising Middle East tensions intensified this, pushing oil prices higher and dragging the rupee beyond ₹95 per US dollar, and closer to ₹9, by mid-2026.
3. Foreign portfolio flows turned negative, with overseas investors reducing exposure to Indian markets and selling rupees in the process, contributing to some of the heaviest outflows on record.

For Australian investors, the effect was direct, even where Indian equities rose in local terms, rupee depreciation ate into the AUD returns.

Why REER matters

Judging the rupee only by its nominal exchange rate, such as USD/INR or AUD/INR, does not tell the full story. These measures show the market price of one currency against another, but they ignore inflation. This matters because India has historically run higher inflation than developed markets. Over time, some nominal rupee depreciation is therefore expected and does not necessarily mean India is becoming less competitive.

A better measure is the Real Effective Exchange Rate (REER). The REER compares the rupee against a basket of India’s major trading partners, adjusted for inflation. For this analysis, we use the RBI’s 40-currency trade-weighted REER index, with a base year of 2015–16 = 100. This provides a broader view of the rupee’s real valuation than simply looking at the currency against the US dollar or Australian dollar.

The adjustment has been significant. The rupee’s 40-currency trade-weighted REER peaked at around 108 in November 2024, suggesting it was trading at an elevated real valuation. It then fell below 100 by mid-2025, declined to 95.1 by December 2025, and reached around 91 by April 2026. In other words, while the nominal rupee was making new lows, the inflation-adjusted rupee was moving from relatively expensive to meaningfully cheaper. 

For investors, this distinction is important. A lower REER can improve India’s external competitiveness and support exporters in sectors such as IT services, pharmaceuticals and auto components.

What the RBI has done

The RBI has not tried to prevent every move in the rupee. Its focus has been on smoothing volatility and avoiding disorderly depreciation. Over the past year, this has included selling dollars from reserves, intervening in offshore forward markets, tightening rules around rupee NDF activity, and using dollar/rupee swaps to support liquidity.

The most notable step came in June 2026, when the RBI introduced a swap window for FCNR(B) deposits. These are foreign-currency deposits placed with Indian banks by non-resident Indians. Under the facility, the RBI absorbs much of the hedging costs that banks would normally incur, allowing them to offer more attractive rates to overseas Indian depositors. Because FCNR(B) deposits are held in foreign currency, the depositor does not take direct rupee risk. Through the swap, much of that risk shifts to the RBI. 

The aim is to attract foreign currency inflows, improve bank liquidity and signal confidence in the rupee.

What this means for Aussie Investors

For Australian investors, rupee weakness has been a drag on returns over the past year, particularly when Indian equity gains are translated back into AUD. However, the balance of risks now looks more even.

The rupee no longer appears expensive on a REER basis, foreign investor positioning is already light, and the RBI is actively supporting foreign-currency inflows. If the currency stabilises, FX could shift from a headwind to a source of return support.

The rupee should therefore be assessed beyond the headline USD/INR or AUD/INR rate. Its real valuation, capital flows, RBI policy response, reserve buffer and India’s structural growth drivers all matter.

Key risks

The rupee remains exposed to higher oil prices, renewed US dollar strength and foreign portfolio outflows. RBI intervention can smooth volatility but not override fundamentals indefinitely. One would think, however, that we have seen the worst of the cyclical swing in fundamentals.

Policy trade-offs also need to be understood. By absorbing hedging costs on foreign-currency deposits, the RBI is taking FX risk onto its balance sheet, while additional rupee liquidity must be managed to avoid inflationary pressure.