India was growing at 8.2% as of the third quarter, a figure of which Prime Minister Narendra Modi’s economic team rarely misses an opportunity to remind global investors. Yet as 2026 approaches, there’s a different number markets should prioritize: 6.35%.
This is how much the rupee has declined against the US dollar this year, making it Asia’s worst-performing currency. And here’s another vital indicator: $1.3 billion. The reference here is to the magnitude of outflows to date in December by global funds withdrawing from Indian equities.
This creates a significant split-screen with China, where policymakers are scrambling to keep the yuan from rising. Xi Jinping’s financial team has managed to keep the yuan’s gain so far in 2026 to 3.3%.
All this matters because, generally speaking, exchange rates don’t lie. And the truth about India’s economy as 2025 draws to a close is that the headline economic growth number is masking signs of distress beneath the surface.
Of course, China faces significant challenges, not least of which is a property crisis that’s fueling deflation. In November, Asia’s biggest economy showed clear signs of stalling. Take factory output growth, which just plunged to a 15-month low. Retail sales, meanwhile, had their worst monthly performance since the “zero-Covid” lockdowns.
And yet, the yuan is reminding currency strategists who once pushed the rupee as a viable alternative that India’s financial system isn’t as ready for global prime time as advertised.
There are several short-term explanations for investors’ shift away from the rupee. One is disappointment that Teams Modi and Trump haven’t forged some kind of tariff deal, leaving India facing a punitive 50% US levy.
Another: the realization that India remains heavily reliant on overseas capital to fund its current-account gap and corporate expansion 11 years after Modi took power pledging to reduce it.
Dhananjay Sinha, research head at Systematix Shares and Stocks Ltd, speaks for many when he warns that it’s time to “favor selective sectoral exposure” at a moment when equities face tepid returns amid a sliding rupee, modest earnings growth and range-bound government bond yields.
On the bright side, the Reserve Bank of India is managing to keep inflation under control. Earlier this month, the RBI cut short-term interest rates by 25 basis points, bringing the easing tally in 2025 to 125 basis points.
Carlos Casanova, an economist at Union Bancaire Privee, notes that consumer prices are “expected to remain below the lower bound of the RBI’s 2-6% target range in the months ahead.”
Going forward, “a great deal hinges on the outcome of trade talks with the US,” notes Moody’s Analytics economist Sunny Kim Nguyen. “Officials have said that big issues have been resolved and that a trade deal should be finalized by the end of December. With domestic demand ticking up and external risks tame, the outlook for 2026 is bright.”
Yet it begs the question why the rupee isn’t reaping the benefits. The forces undermining the rupee–continued demand for the dollar, a widening trade deficit, external pressures from tariffs to global trade uncertainty–aren’t going away. Not without Team Modi stepping up efforts to address the underlying cracks in India’s financial system.
Here, the Donald Trump factor matters greatly. Though “India’s outlook is supported by earlier monetary easing and targeted fiscal measures,” says economist Marcello Estevao at the Institute of International Finance, Modi’s economy “still faces significantly higher rates near 50%.” The only good news, he adds, is that while “these adjustments have altered trade patterns,” they “have not derailed overall momentum.”
Not yet, at least. In October, India’s exports to the US fell 8.5% year-on-year, contributing to an 11.8% drop in overall outbound trade. As HSBC Research notes, weaker growth and tight fiscal policy may require additional monetary easing in 2026.
More importantly, though, Modi’s team must get serious about reforms to increase competitiveness and spread the benefits of economic growth.
The rupee’s stumble this year suggests that Modi’s efforts to promote the India-is-open-for-business narrative are running ahead of underlying fundamentals. That business boom promise, after all, was why India’s 1.4 billion-person population elected Modi to national office back in 2014.
Modi’s legend had loomed large since the early 2000s, back when he became chief minister of Gujarat. The economic successes of the western state on Modi’s watch endowed him with folk-hero status that captivated much of the vast nation.
Year after year, from 2001 to 2014, Modi’s policies often produced higher gross domestic product (GDP) growth, greater productivity and innovation, lower bureaucracy and corruption, and better infrastructure than the national averages.
In 2014, voters returned the Bharatiya Janata Party (BJP) to power in hopes Modi would apply the “Gujarat model” throughout Asia’s third-biggest economy.
Generally speaking, the last decade hasn’t gone nearly as well on the ground as India’s masses had hoped. By now, it’s clear that, for reasons economists can debate, Modi’s Gujarat model isn’t as scalable as advertised. Certainly not without a ready burst of reformist energy.
Part of the problem is that an 8% growth rate doesn’t ensure that its benefits reach the middle and lower classes. One of the best-case scenarios in the short run would be for Modi to reach an understanding with Trump on import tariffs.
“After a very strong 2025, economic growth in India is likely to slow in 2026 and 2027 in the face of punitive US tariffs,” says economist Shilan Shah at Capital Economics. “But they could get rolled back.”
Under the hood, though, Modi’s most crucial economic strategy is coming up short. The reference here it to the “Make in India” initiative Modi unveiled 11 years ago.
The goal, as envisioned in 2014, was to increase the manufacturing share of GDP from approximately 17% to 25% by 2022. Unfortunately, manufacturing is now less than 16% of GDP.
This failure is a microcosm of why “Modinomics” entered the Trump 2.0 era and its draconian tariffs rather off-balance. Modi’s emphasis has been on high-profile short-term investments and milestones, rather than on the heavy lifting beneath the surface to cut bureaucracy, increase transparency, level playing fields, strengthen human capital and raise productivity.
In a July Reuters poll, more than 70% of independent economists — 37 of 50 — agreed the official jobless rates at the national and local levels are inaccurate.
“We have a massive employment problem and that is not reflected in the data,” notes Pranab Bardhan at the University of California, Berkeley.
“Most Indian workers are underemployed. If you are able-bodied and you did not work for any time, not even one hour in the last six months, unless you are rich, how did you feed yourself?… So you scrounge around and do something. And then you are employed. Now what does that employment mean?”
Duvvuri Subbarao, RBI governor from 2008-2013, adds that “unemployment is one of our big challenges and I don’t believe the government data reflects the true ground situation.”
It matters greatly, too, what kind of jobs India is creating, Subbarao argues. He recommends a greater focus on manufacturing to maximize employment rather than on less labor-intensive sectors like information technology and finance.
As these troubles fester below the surface, Modi’s impulse is to bask in the glow of an 8% GDP rate. But exchange rates don’t lie. The rupee’s slide is making it clear that India’s economy isn’t as ready for the global prime time as New Delhi suggests.
Follow William Pesek on X at @WilliamPesek
