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Rupee's Drop: Capital Woes, Not Deficit Worries
17 Dec, 2025
Summary
- Rupee's fall stems from weak capital inflows, not deficit.
- JPMorgan predicts one final Fed rate cut in January.
- Core inflation hints at significant slack in India's economy.
The Indian rupee's recent decline is attributed by JPMorgan's Jahangir Aziz to pressures on the balance of payments, rather than a worrying current account deficit. India's deficit remains modest at approximately 1.2% of GDP, a level historically financed without significant issues. Aziz highlights weak capital inflows, including muted foreign portfolio investment and slow foreign direct investment growth, as the primary challenge.
Aziz forecasts that global markets will navigate 2026 with uncertainty, influenced by mixed US economic signals and a strong dollar. He believes the US Federal Reserve will likely implement one final rate cut in January 2026 before a lengthy pause, with potential rate hikes not expected until 2027.
Furthermore, Aziz observes that while headline inflation in India may rise modestly in 2026 due to base effects, persistent weak core inflation indicates significant slack. This suggests soft domestic demand and excess capacity within the Indian economy, impacting overall economic health.
