For the past few months, India's strong growth story had been overshadowed by a weakening rupee. That changed in June, when the currency snapped a three-month losing streak. Domestic equities also extended their rally, making financial markets one of the biggest contributors to India's widening lead in Mint's Emerging Markets Tracker (EMT).
India retained the top position in June with a score of 82.3, comfortably ahead of China (70.4) and Vietnam (70). While the top three rankings remained unchanged from May, India's lead widened as the rupee recovered, equity markets remained strong and core macroeconomic indicators stayed resilient.
The turnaround coincided with a series of developments.
The Reserve Bank of India's (RBI) special foreign currency non-resident (FCNR) deposit scheme boosted confidence in external liquidity, easing geopolitical tensions in West Asia improved global risk appetite, and foreign portfolio investors (FPIs) returned to Indian equities. Softer crude oil prices also reduced pressure on the rupee and other emerging-market currencies.
Launched in September 2019, Mint's Emerging Markets Tracker compares 12 emerging economies using seven high-frequency indicators—GDP growth, manufacturing PMI, export growth, retail inflation, import cover, exchange-rate movements and stock market performance.
India extends its lead
India's performance became more broad-based in June, with strength spread across both macroeconomic and financial indicators.
GDP expanded 7.8% in the March quarter, the second-fastest among the economies tracked, after Vietnam. Manufacturing activity remained firmly in expansion mode with a PMI of 54.2, while merchandise exports rose 15.5% year-on-year.
Foreign exchange reserves continued to provide a comfortable 9.7 months of import cover, and although retail inflation accelerated to nearly 4.4%, it remained lower than in several peer economies.
The biggest improvement, however, came from financial indicators. The rupee appreciated 0.6% against the US dollar after weakening for three consecutive months, while Indian equities posted gains for a third straight month. Together, these two indicators substantially strengthened India's overall EMT score.
China held on to second place, supported by robust export growth of 26.9%, subdued inflation of 1% and one of the strongest import cover ratios at 13.2 months. Vietnam remained close behind in third, recording the fastest GDP growth (8.2%) and export growth (28.5%) among the economies tracked, although its relatively thin import cover of 2.2 months continued to weigh on its score.
Breathing room
June marked the first meaningful improvement in the rupee since March. The recovery came as global financial conditions turned more supportive for emerging markets.
After weakening for three consecutive months, the rupee appreciated 0.6% against the US dollar in June, making it one of only five currencies in Mint's tracker to strengthen during the month. The gains, however, were short-lived, with the currency slipping 0.8% again by 21 July. On the other hand, stock market capitalization rose 1.2% in June and a further 1.9% till 16 July—the strongest gain among the 12 emerging markets tracked.
Easing tensions in West Asia reduced demand for safe-haven assets, while renewed FPI inflows improved investor sentiment towards Indian assets. At the same time, the RBI unveiled a concessional swap facility on 5 June, allowing banks to mobilize foreign currency non-resident [FCNR(B)] deposits, overseas foreign currency borrowings (OFCBs) and external commercial borrowings (ECBs) at significantly lower hedging costs.
The scheme has already attracted sizeable inflows. According to the RBI's latest update, banks mobilized $20.72 billion under the facility between 8 June and 17 July. FCNR(B) deposits accounted for $17.41 billion, nearly 84% of the total, while OFCBs contributed $1.97 billion and ECBs $1.34 billion. The RBI said the facility had attracted "steady forex inflows" within just five weeks of its launch.
These inflows strengthen India's balance of payments, replenish foreign exchange reserves and provide the RBI greater flexibility to smooth currency volatility. Combined with improving equity inflows, they helped reverse the negative momentum that had weighed on the rupee over the previous quarter.
Can the momentum last?
The stronger rupee has given India's macro story greater balance, but whether June marks a turning point or merely a temporary reprieve will depend on what follows after the initial surge in deposits.
In a recent Mint column, Madan Sabnavis, chief economist at Bank of Baroda, argued that FCNR deposits should be viewed as a liquidity bridge rather than a durable source of external financing. By absorbing the exchange-rate hedge through concessional swaps, the RBI has enabled banks to offer more attractive returns to NRIs, encouraging fresh deposits without exposing banks to currency risk. But those deposits mature in three to five years and will eventually have to be repaid or rolled over.
During the RBI's previous FCNR mobilization drive in 2013-14, deposits jumped from around $15 billion to $41 billion before gradually declining to about $34 billion by 2025-26. This time, inflows have already crossed $20 billion in little over a month, and analysts estimate they could eventually reach $50-80 billion before the window closes in September, according to Reuters.
However, the next phase of movements becomes important to see if the interventions could preserve the rupee's gains beyond the life of the scheme, India will need more durable sources of foreign exchange, including stronger foreign direct investment, sustained portfolio inflows and healthy export growth. If those drivers remain supportive, the financial-market revival seen in June could reinforce India's macroeconomic leadership in the EMT over the coming months. If not, the currency could once again emerge as the weakest link in an otherwise robust growth story.