A report by the State Bank of India emphasizes that India requires a comprehensive and long-term policy approach to tackle growing risks from a weakening rupee, rising imported inflation, and an expanding balance of payments (BoP) deficit. The report identifies the main concern as the “second-round effects” of external shocks, particularly through exchange rate movements. It explains that a depreciating rupee raises the cost of imports, which in turn fuels inflation. At the same time, persistent capital outflows continue to exert downward pressure on the currency.

According to the report, the current depreciation of the rupee does not align with India’s macroeconomic fundamentals, making it essential to control these secondary effects to prevent inflation expectations from becoming unanchored. It stresses the need for structural solutions to address the BoP deficit.

Second-round effects refer to the broader economic impact that follows an initial shock. In this case, a weaker rupee increases the cost of imported goods such as oil and raw materials. Over time, businesses transfer these higher costs to consumers, leading to widespread price increases and higher inflation expectations, which complicates policy efforts to maintain price stability.

The data shows that the rupee depreciated by 6.39 percent between April 2025 and February 2026, with a further 3.63 percent decline following the West Asia conflict. Additionally, foreign institutional investor outflows amounting to USD 6.4 billion have intensified pressure on the currency. The report warns that exchange rate depreciation cannot continue to serve as a reliable shock absorber, as it may instead become a source of inflation transmission through higher import costs. This could destabilize inflation expectations and make monetary policy more challenging.

On the external front, the report projects that India’s BoP may remain in deficit in FY27 at around USD 28 billion, with the trade balance also expected to stay negative. The current account deficit is estimated at USD 54.1 billion for FY27, compared to USD 31.5 billion in FY26. Although the capital account is likely to post a surplus of USD 26.5 billion due to positive capital inflows, it may not be enough to fully offset the current account gap.

The report further cautions that the BoP deficit could persist for a third consecutive year, highlighting the urgency for policy intervention. It concludes that depending solely on exchange rate adjustments is not a sustainable strategy in a volatile global environment, and calls for broader structural measures to manage external imbalances and inflation risks effectively.