Why Is the Rupee Falling When Growth Is Strong — Is the Capital Account to Blame?

The recent fluctuations in the USD/INR exchange rate raise an important question. This inquiry does not concern India's growth, which is now widely accepted as a fact. Instead, it focuses on who will finance that growth.

Understanding the Capital Account Problem

At its core, this situation is a capital account issue within India’s Balance of Payments.

Consider India's balance sheet. On the asset side, the narrative is compelling. Real assets are compounding, platforms are scaling, and India is rapidly becoming the largest consumer market in the world. However, the stress manifests on the liability side.

Structuring the Balance Sheet

How can India structure its balance sheet to attract cheaper, longer-duration, and higher-quality capital at scale?

In finance, this is a signaling problem. High-quality capital leads to increased quantity. Credible exits compress risk premia. Unfortunately, India currently sends the opposite signal. Capital withdrawal remains unnecessarily difficult.

For instance, consider Non-Resident Indians (NRIs) investing in Indian real estate. The Tax Deducted at Source (TDS) norms are significantly higher than global standards. While exemptions do exist, the complexity itself acts as a tax. This friction sends a clear signal to global capital.

Long-Term Capital Gains

The same question arises regarding long-term capital gains (LTCG). How do India’s LTCG rates compare with those of global financial centers that compete for the same balance sheets?

If global capital is expected to support India’s growth, it must be allowed to realize returns without penalty. It is essential to reward the balance sheets that fund growth.

The Opportunity for Reform

Capital account reform represents a significant opportunity hidden behind the recent USD/INR movements. This reform should not merely aim to defend the currency but rather to transform it into a structural advantage for India’s next decade.

By addressing these issues, India can create a more favorable environment for investment. This will not only stabilize the rupee but also enhance the overall economic landscape.

Conclusion

In conclusion, the challenges facing the Indian rupee amidst strong growth are multifaceted. The capital account plays a crucial role in this dynamic. By reforming the capital account and simplifying investment processes, India can attract the necessary capital to sustain its growth trajectory.

Disclaimer: In the article "Why Is the Rupee Falling When Growth Is Strong — Is the Capital Account to Blame?" above - Any views, comments, or communication (above or in the past) should not be construed to be investment advice by Alternative Growth (hereafter referred to as “AltG”) in any form whatsoever. AltG does not make an offer to sell or solicit to buy any securities.