Where We Are

The rupee has depreciated against the dollar at a compound annual rate of approximately 5% since the 1991 liberalisation. The journey reads like a one-way ladder: Rs 3.30 at independence in 1947, Rs 17 before liberalisation, Rs 46 by 2000, Rs 75 in 2020, Rs 97 today. While the RBI has managed the pace of depreciation effectively, there has not been a sustained reversal along that path.

The current stress has a specific character worth noting. The rupee has weakened 12% over the last 12 months. The DXY dollar index, by contrast, fell 9.4% through all of 2025. That is rupee-specific stress, and it points directly to the forces underneath.

Three Catalysts, None Short-Lived

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The first is oil. India imports 88% of its crude requirement, and Brent crude ranged between $97 and $110 per barrel in May 2026, spiking above $110 precisely when the rupee hit its record low. Every dollar increase in the oil price widens the import bill, adds to current account pressure, and increases structural demand for dollars. The RBI cannot drill its way out of this.
The second is capital flows. Foreign portfolio investors have pulled Rs 2.2 lakh crore from Indian equities in 2026 alone, the worst outflow year since FPI investing in Indian equities was first permitted in 1992. When foreign capital exits, it exits in dollars. Dollar supply in the market falls, demand rises, and the rupee weakens. The mechanism is direct and the numbers are not small.The third is the inflation differential. India’s CPI has run structurally above US CPI over any five-year or longer horizon, and purchasing power parity adjustments work quietly but persistently in the background. The approximately 5% annual depreciation since 1991 is not coincidental to this differential. It is mechanical.

None of these catalysts resolve quickly. Oil dependence is a decade-long infrastructure challenge. FPI flows depend on global risk appetite and relative valuations that will remain volatile. The inflation differential compresses only when India’s supply-side productivity gains structurally outpace the US over a sustained period. The RBI Governor has stated the bank will do “whatever is required” for orderly markets and that the rupee appears undervalued.

But rate hikes to defend the currency are not on the agenda. The tools available to the central bank are narrower than the structural forces pressing against it.

What This Means for Portfolio Construction

A dollar-denominated asset earns on two levels for an Indian investor: the USD return of the underlying, and rupee depreciation layered on top. At the 10-year average depreciation rate of 3.4%, a flat-returning US asset still delivers a 1.4x return in INR over a decade, purely from currency. At the long-run 5% rate, currency alone roughly doubles the INR value of any dollar asset over 20 years. The dollar has strengthened against the rupee on a net basis for 34 years. The currency tailwind is built into the asset class.

Sure, the Nifty 50 TRI delivered 14.6% CAGR in INR terms for the decade ending 2023, a strong number on any measure. The S&P 500 in INR delivered approximately 15-16% annualised over the same 10-year window, per reconstructed data combining S&P 500 USD returns with RBI exchange rate data. Comparable headline returns, but with uncorrelated drivers. When oil spikes and FPI outflows hit simultaneously, a domestic-only portfolio absorbs the equity market impact and the currency erosion at the same time. A portfolio with dollar exposure absorbs the equity impact but earns on the currency move. Those are meaningfully different risk profiles wearing similar return numbers.

A 20 to 30% allocation to US equities through the LRS route, built over time via low-cost index ETFs and direct stocks accessible through platforms like Appreciate, is a structural response to a structural reality: the rupee has weakened at approximately 5% annually for 34 years, three catalysts sustain that pressure today, and a portfolio concentrated entirely in one currency carries a risk the data has been pricing in for decades.

(The author, Subho Moulik is Founder & CEO at Appreciate)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times.)