LAHORE: The year 2026 has barely begun, yet the early signals for India’s economy are already deeply unsettling.
In the first week of January alone, India’s foreign exchange reserves suffered their sharpest weekly fall in 14 months, dropping by nearly 10 billion dollars to around $552 billion.
The decline was not the result of a sudden external shock but of a conscious policy response: the Reserve Bank of India stepped in to sell dollars to defend a weakening rupee.
That intervention itself is telling.
It signals that currency pressures have intensified to the point that market forces alone are no longer trusted to maintain stability.
The rupee’s weakness is not new, but its persistence is increasingly problematic.
Over the course of 2025, the currency depreciated by nearly 6%, making it Asia’s worst-performing unit, according to Bloomberg and Reuters.
The slide has continued into the opening days of 2026, with further losses driven by foreign capital outflows and uncertainty surrounding India’s external economic relationships.
Eroding external confidence
Forecasts from major financial institutions suggest the Indian rupee could approach 92 to the dollar by March from the current value of 90.25, a level that would deepen imported inflation, strain corporate balance sheets, and tighten domestic financial conditions.
In effect, currency weakness is becoming a mirror of eroding external confidence.
Equity markets are reflecting the same anxiety.
The new year opened with a sharp selloff that pushed both the Sensex and the Nifty lower, erasing between $140 billion and $166 billion in investor wealth in a matter of days.
The immediate trigger was political, renewed warnings from Washington of higher tariffs on Indian goods, but the reaction revealed something more fundamental.
Investors are increasingly uneasy about India’s exposure to a world in which trade is becoming more politicized, alliances more conditional, and economic relationships more vulnerable to geopolitical shifts.
Foreign investors, in particular, are voting with their feet.
Largest annual outflow
In 2025, foreign portfolio investors sold roughly $18 billion worth of Indian equities, the largest annual outflow on record.
The trend has not reversed with the calendar.
In the first nine days of 2026 alone, another $1.3 billion has already been pulled out of Indian markets.
Capital that once flowed steadily into India’s growth story is now retreating, not because growth has vanished, but because the risks surrounding that growth have become harder to price and harder to ignore.
Trade tensions with the United States have emerged as one of the most destabilizing forces.
Washington has already imposed tariffs of up to 50% on Indian goods, partly linked to India’s continued purchases of Russian oil.
The situation has escalated further with political support in the US for even harsher measures, including proposals for tariffs of up to 500% on imports from countries doing business with Russia.
As the world’s second-largest buyer of Russian crude after China, India finds itself uncomfortably exposed.
Even if such extreme tariffs are never fully implemented, their mere possibility is enough to chill investment, disrupt planning, and inject uncertainty into trade and financial markets.
What makes this moment particularly troubling is not any single indicator, but the convergence of pressures.
Weakening currency
A weakening currency is forcing the central bank to intervene. Falling reserves are signaling external vulnerability.
Trade tensions are undermining investor confidence. Capital is flowing out, not in.
Together, these forces form a feedback loop in which uncertainty feeds financial stress, and financial stress reinforces uncertainty.
India is not facing a crisis in the classic sense.
Growth has not collapsed, and the economy retains significant underlying strengths. But the narrative has shifted.
For years, India was presented as the world’s next great growth engine, stable, predictable, and increasingly central to global supply chains.
In 2025, that narrative was replaced by a quieter, more cautious one: the economy is under strain. In 2026, it is only getting worse.
