Remittances anchor the rupee, India’s external balances

The Indian rupee has lost nearly 12% of its value against the U.S. dollar since May 2025. Several analysts have noted the consistent decline in net Foreign Direct Investment (FDI) and net Foreign Portfolio Investment (FPI) flows as a cause.

The ebbing of net FDI and FPI flows notably began much before the current energy crisis due to the war in West Asia. A declining trend in net FDI began in the second quarter (Q2) of 2021-2022. As of Q3 of 2025-26, net FDI was negative. The declining trend in net FPI, which is also at a negative, started in Q4 of 2023-24 (Chart 2).

It is commonly understood that a downward (depreciation) pressure is structurally inherent upon the rupee because of India’s persistent Current Account (CA) deficit, which in turn stems from India’s persistent trade deficit.

Consequently, buoyant net positive FDI and FPI flows, recorded in the Financial Account (FA), are considered crucial to not only finance the CA Deficit (CAD), but to countervail the downward pressure on the rupee. However, there is an overemphasis on these two, at the cost of the other important flow for India, namely, remittances, recorded in the CA, which does the heavy lifting for both the financing of the CAD and in tackling the pressure on the rupee. Not accounting for remittances risks non-mitigation of a major external vulnerability: the ebbing of remittance flows that is also likely.

The CA primarily consists of three component flows: the trade deficit, the Net Primary Income (NPI) deficit and the Net Secondary Income (NSI) surplus. The NPI mainly reflects the net negative balance of investment income earned by Indian residents on foreign assets and paid on India’s external liabilities held by foreign counterparts. The NSI essentially accounts for its huge net positive remittance flows. India attracts the highest remittances (in $) by a wide margin. In 2024, India saw $138 billion in remittances.

They matter significantly for India’s CAD and the rupee. Firstly, since mid-2013, remittances have on an average financed more than the entirety of India’s trade deficit (Chart 4). As a result, the CAD financed by the FA flows of FDI and FPI is a residual of the two persistent deficits in the CA, leftover after the remittances have financed their bulk. If not for India’s high net remittances, its CAD would be much larger and the financing demands on the FA also higher.

Secondly, net remittances, averaging about 3% of the Gross Domestic Product (GDP), are much higher than the net FDI and FPI flows. Thirdly, unlike, say FPI, remittances are not given to sudden halts, for they are largely driven by the income and savings decisions of the Indian diaspora and their respective familial needs back home. Fourthly, unlike FDI and FPI, remittances are transfers and not claims. Hence, they do not generate future liability outflows. Lastly, remittances have low transaction costs.

A lot rides on remittances now because the more the rupee slips, the more diaspora remitters are likely to wait till it bottoms out. Concomitantly, with the trade deficit likely to increase due to costlier energy imports, a wide gap can emerge in the remittances’ ability to cover this deficit. This will in turn increase the CAD and its financing demands on the FA, at a time when net FDI and FPI flows are negative. Yet, despite their importance, analyses of remittances pale in comparison to those of FDI and FPI flows. It is perhaps because remittances are largely the result of small financial decisions by thousands of working-class Indians abroad, who do not animate globalised elites in the same way as talks of FDI and FPI do.