India's External Investment Deficit a Hurdle for Rupee Amid Weak Dollar Rally in Asia
- Rupee underperforms despite weaker dollar; stays flat while other Asian currencies rise.
- India’s negative NIIP (–$350B) weighs on currency strength.
- Lack of foreign assets limits hedging, unlike peers with trade surpluses.
As most Asian currencies gain ground against a softening U.S. dollar, the Indian rupee continues to underperform, hampered by the country’s weak external investment position, analysts say.
While the Singapore dollar, South Korean won, and Taiwanese dollar have appreciated between 6% and 9.5% this year, the rupee has remained largely flat. Analysts attribute this divergence to differences in net international investment positions (NIIP) across Asia.
NIIP measures the difference between a nation’s overseas assets and its external liabilities. A positive NIIP indicates that a country owns more than it owes, while a negative NIIP signals the opposite.
As of December 2024, India’s NIIP stood at a negative $350 billion, reflecting the amount it owes the world in excess of its foreign asset holdings. In contrast, countries like Taiwan, South Korea, China, and Hong Kong maintain substantial positive NIIP levels, supported by years of consistent trade surpluses.
“The absence of a positive NIIP for India implies underperformance of the rupee”, said Mitul Kotecha, Head of FX and EM macro strategy, Asia, at Barclays. “It limits the rupee’s ability to benefit from dollar weakness like its Asian peers”.
A positive NIIP typically supports a local currency during dollar downturns. As the value of foreign-held U.S. assets falls, investors in surplus economies tend to hedge by selling dollars and buying their home currencies, boosting local exchange rates.
According to Barclays, Singapore, Taiwan, China, and Korea hold the most liquid net international assets in Asia, while India and Indonesia remain at the bottom of the list.
“It’s not a very negative story for India”, said Brad Bechtel, global head of FX at Jefferies. “It’s just more of a lagging one”.
Market participants are increasingly focused on NIIP as they assess the broader impact of a weakening dollar. The Federal Reserve’s May meeting minutes cited rising demand for currency hedges as one reason for the dollar’s slide.
Analysts at BMI, a Fitch Group company, noted that currencies backed by international surpluses could benefit further as companies repatriate capital or hedge previously unhedged exposures. The sharp appreciation of the Taiwanese dollar this year was cited as a key example.
With global capital flows shifting, India’s persistent investment deficit may continue to keep the rupee on the sidelines even as the rest of Asia rides the tailwinds of a weakening dollar.
