Forex reserves cushion rupee as external pressures mount

India’s external balances have come under pressure in recent months, pushing the rupee past 90 to the dollar and tipping the balance of payments into deficit, even as the country’s foreign exchange reserves and broader vulnerability metrics remain far stronger than in past stress episodes, according to a new report by Goldman Sachs.

The rupee has depreciated about 5% so far this year, sliding past 90 last week as weaker exports, higher gold imports and subdued capital inflows widened the current account deficit and reduced the Reserve Bank of India’s intervention in currency markets, the bank’s economists wrote in a note dated 11 December.

India’s balance of payments slipped into a deficit of 1.1% of gross domestic product (GDP) in the third quarter of calendar year 2025, reversing a surplus in the previous quarter, as exports to the US fell following the imposition of steep tariffs and gold imports surged.

Goldman Sachs expects the deficit to widen further in the fourth quarter, with the current account gap projected to reach about 3% of GDP.

A record goods trade deficit in October and continued uncertainty around an India–US trade agreement have weighed on capital flows, the report said. Foreign investors have sold roughly $17 billion of Indian equities so far this year, contributing to weaker external flows and higher rupee volatility.

Despite the deterioration in near-term flows, Goldman Sachs said India’s overall external vulnerability remains “significantly better” than during previous crisis periods such as the 2013 taper tantrum or the global financial crisis.

The bank’s assessment highlights strong reserve coverage, a relatively high import cover and a wide growth differential between India and the rest of the world as key buffers.

On a composite vulnerability index combining flow and stock indicators, India’s position in 2025 remains far less stressed than in earlier episodes, even as balance-of-payments metrics have weakened, the report showed.

The rupee has already adjusted sharply on a real trade-weighted basis, correcting about 8% over the past year, which Goldman Sachs said could help cushion the economy against external shocks.

A weaker trade-weighted currency would partially offset the impact of higher US tariffs on Indian exports, while low headline inflation limits the risk of imported price pressures.

Goldman Sachs expects the external picture to improve from the first quarter of calendar year 2026. The bank forecasts the current account deficit will narrow sharply to about 0.1% of GDP in the March quarter, supported by stronger exports and seasonally lower gold imports.

The baseline scenario assumes that the additional 25% tranche of US tariffs on Indian exports is negotiated down by the end of this year.

An easing of trade-related uncertainty is also expected to support a recovery in capital flows, strengthening the balance of payments and reducing pressure on the currency.

Under that scenario, Goldman Sachs said the “peak rupee underperformance is behind us,” although the RBI is likely to rebuild foreign exchange reserves, limiting the scope for a sharp appreciation.

The bank revised its dollar-rupee forecasts to 89.5 in three months and 91 in both six and 12 months, compared with earlier estimates of 88, 87.5 and 86.5, reflecting near-term pressure even as medium-term risks moderate.

If negotiations with the US are delayed into the first quarter of 2026, however, the report warned that India’s external position would remain weaker than its baseline forecast, leaving the rupee under continued strain.