New Delhi, India – May 24, 2026 – India’s financial landscape is grappling with a peculiar dichotomy: a robust domestic equity market powered by retail investors, yet a persistently weak currency. In a significant analytical report, global brokerage Jefferies has pinpointed this dynamic, asserting that the Indian Rupee (INR) remains Asia’s most undervalued currency in 2026, primarily due to an unprecedented exodus of foreign portfolio investment (FPI) from Indian equities, largely absorbed by the relentless flow of domestic capital through Systematic Investment Plans (SIPs). This intricate interplay, the firm argues, has inadvertently weakened India’s capital account and exerted sustained pressure on the national currency, pushing it to record lows.
The report, tellingly titled "INR Pressure – The Downside of SIPs," challenges conventional wisdom that often attributes currency weakness to factors like elevated oil prices or a widening current account deficit. Instead, Jefferies posits that the sheer scale of foreign selling, enabled by the robust buying power of Indian retail and institutional investors, has become the dominant force shaping the Rupee’s trajectory. This phenomenon has created a unique economic scenario where a seemingly strong domestic market indirectly contributes to currency depreciation, a trend with profound implications for India’s balance of payments and future capital flows.
The Rupee’s Plunge: A Record Low Amidst Domestic Resilience
Chronology of a Currency Under Pressure
The year 2026 has witnessed the Indian Rupee’s valuation against the US Dollar reach unprecedented depths, sliding over 9 percent to a record low of 96.96. This depreciation places the INR firmly at the bottom of the Asian currency basket in terms of performance, raising concerns among policymakers and market participants alike. While currency fluctuations are a natural part of global economics, the sustained and significant weakening of the Rupee this year, despite a seemingly buoyant domestic equity market, has prompted deeper scrutiny.
Historically, the Indian Rupee’s movements have been closely tied to a confluence of global and domestic factors. Global crude oil prices, given India’s heavy reliance on imports, have always been a critical determinant, with spikes typically leading to a wider current account deficit and subsequent Rupee weakness. Similarly, global monetary policy shifts, particularly from the US Federal Reserve, and geopolitical events have frequently triggered capital outflows and currency depreciation. However, Jefferies’ latest analysis suggests a departure from these traditional drivers, highlighting a structural shift in capital flow dynamics that is now exerting primary influence.
The last two years, particularly FY25 and FY26, have been pivotal. While the world grappled with inflation and rising interest rates, India’s domestic savings channeled into equities through SIPs and mutual funds have grown exponentially. This burgeoning domestic liquidity has coincided with a period of significant foreign divestment, creating a unique, almost symbiotic relationship where foreign capital exits are seamlessly absorbed by local buying. This narrative underscores a maturing domestic investment ecosystem, capable of cushioning market falls, but also reveals a less discussed consequence: the impact on the national currency.
Unpacking the Data: FPI Exodus, SIP Influx, and Capital Account Erosion
Supporting Data and Detailed Analysis
Jefferies’ report meticulously details the figures underpinning its assertion. Over the past two years, an astonishing $78 billion worth of Indian equities has been offloaded by foreign entities. This substantial figure encompasses sales by Foreign Institutional Investors (FIIs), private equity firms, and even foreign promoters paring down their stakes. This scale of divestment is indicative of a broader trend among foreign investors to re-evaluate their exposure to what many perceive as an "expensive market" in India, especially when compared to other emerging economies or alternative global investment opportunities.
The brokerage further highlights the staggering pace of FPI selling, noting a record $21 billion worth of Indian equities sold in FY26 alone. This trend has not abated in the current fiscal year, FY27, with FPIs continuing to be net sellers. Since April 2024, the cumulative net FPI outflows from Indian equities have ballooned to an alarming $44 billion. Such massive capital withdrawal, under normal circumstances, would typically trigger a sharp correction in domestic benchmark indices. However, India’s Nifty and Sensex have displayed remarkable resilience, often scaling new highs, a testament to the unparalleled strength of domestic liquidity.
This resilience, Jefferies emphasizes, is directly attributable to the burgeoning domestic investor base. Systematic Investment Plans (SIPs) have emerged as a cornerstone of India’s retail investment boom. These regular, disciplined investments by millions of individual investors into mutual funds have created a consistent and powerful stream of capital flowing into the equity markets, acting as a formidable counterweight to foreign selling. Beyond retail SIPs, domestic institutional investors, including pension funds like the Employees’ Provident Fund Organisation (EPFO) and the National Pension System (NPS), have also significantly increased their allocation to equities, further bolstering local market liquidity.
The "Downside of SIPs": A Deeper Look
While domestic inflows have insulated the Indian equity market from dramatic corrections, Jefferies argues that this very strength has inadvertently undermined India’s capital account. The capital account, a critical component of a country’s balance of payments, records all international capital transfers. A surplus typically indicates an inflow of foreign capital, strengthening the domestic currency. Conversely, a deficit suggests capital outflow, putting pressure on the currency.
According to Jefferies’ analysis, India’s capital account surplus has plummeted dramatically to approximately 0.5% of GDP across FY25 and FY26 combined. This represents the weakest level on record, a stark contrast to the average surplus of 2.6% observed over the preceding decade. The primary culprit for this erosion is the substantial FPI exit, which, despite being absorbed by domestic buying in the equity market, still constitutes a net outflow of foreign currency from the economy.
Adding to this challenge is the subdued inflow of Foreign Direct Investment (FDI), which remained around $5 billion during the two-year period. FDI, typically a more stable and long-term form of foreign capital, has not been sufficient to offset the portfolio outflows. Factors such as promoter stake sales by foreign entities and private equity exits have further contributed to the net capital outflow, exacerbating the pressure on the capital account.
The cumulative effect of heavy FPI selling, coupled with weak FDI, has kept India’s balance of payments in deficit for the past two years. Jefferies projects another "soft year ahead," implying continued pressure on the capital account and, by extension, the Rupee, unless significant shifts in capital flow dynamics occur. The core argument is that while domestic investors are buying assets, they are doing so with domestic currency, whereas foreign investors are selling assets and repatriating foreign currency, thereby creating a net demand for foreign currency and weakening the Rupee.
Official Stance, Expert Views, and Policy Implications
Official Responses and Broader Economic Perspectives
While the Jefferies report presents a stark analysis, official responses from the Indian government and the Reserve Bank of India (RBI) have generally acknowledged the currency’s volatility while emphasizing the resilience of the overall economy. The RBI, as the custodian of India’s monetary policy and currency stability, typically intervenes in the foreign exchange market to manage excessive volatility, rather than targeting a specific Rupee level. Its arsenal includes selling US Dollars from its foreign exchange reserves to stem depreciation or buying Dollars to prevent appreciation. The exact extent of the RBI’s interventions in the current period remains subject to market speculation, but its role in maintaining orderly market conditions is crucial.
Economists and market analysts outside of Jefferies largely concur with the observation of robust domestic flows offsetting foreign selling. However, there is a divergence of opinion on the extent to which this dynamic is directly causing Rupee weakness versus merely preventing a deeper market correction that might have otherwise attracted foreign capital at more attractive valuations. Some argue that a weaker Rupee, while challenging for importers, can boost exports and make Indian assets more attractive to foreign investors in the long run.
The government, on its part, has consistently focused on improving the ease of doing business, attracting FDI through various incentive schemes, and fostering a stable macroeconomic environment to encourage foreign capital inflows. The narrative often highlights India’s strong economic growth prospects, large domestic market, and demographic dividend as magnets for long-term investment. The ongoing focus on infrastructure development and manufacturing under initiatives like "Make in India" is also geared towards enhancing India’s attractiveness as an investment destination.
However, the Jefferies report introduces a nuanced challenge: how to balance the positive impact of domestic financialization (increased SIPs, mutual fund participation) with its unintended consequences on the capital account and currency. This calls for a careful calibration of policies that encourage domestic savings and investment while simultaneously creating an environment that encourages sustained, long-term foreign capital inflows.
Looking Ahead: Implications and Potential for Reversal
Future Outlook and Policy Considerations
The implications of Jefferies’ findings are multifaceted, touching upon market stability, currency valuation, and the broader economic trajectory.
For the Rupee: Continued pressure on the capital account due to sustained FPI selling, even if absorbed by domestic buying, suggests that the Rupee could remain undervalued in the near term. A persistently weak Rupee impacts importers by making foreign goods and services more expensive, potentially contributing to imported inflation. It also increases the cost of servicing foreign-denominated debt. Conversely, it benefits exporters by making Indian products more competitive globally and boosts earnings for companies with significant foreign currency revenues.
For Indian Markets: The reliance on domestic liquidity to absorb foreign selling highlights the growing self-sufficiency of India’s capital markets. While this has prevented major corrections, it also raises questions about the sustainability of this dynamic. Should domestic inflows slow down, or should FPI selling intensify beyond the current absorption capacity, the market could become vulnerable. Furthermore, the "expensive market" perception that drives FPI exits could persist, limiting fresh foreign capital infusion unless valuations adjust.
For the Economy: A weak capital account, as highlighted by Jefferies, points to a structural challenge that needs attention. While India’s current account deficit has historically been a concern, the new dimension of capital account weakness due to FPI exits presents a different policy puzzle. The government and RBI will need to consider strategies to not only attract more stable FDI but also to encourage FPIs to view India as a long-term investment destination rather than a tactical play. This could involve further structural reforms, improving corporate governance, and ensuring policy predictability.
Despite the current challenges, Jefferies does see a silver lining and the possibility of a turnaround. The brokerage points to historical precedents: in three of the last four instances where the Rupee weakened by over 10% in a 12-month span, FPI inflows recovered sharply in the subsequent year. This historical pattern suggests that significant depreciation often makes Indian assets more attractive, drawing foreign investors back into the market.
What could trigger this recovery? Several factors could contribute:
- Valuation Correction: A sustained period of Rupee weakness could eventually make Indian equities appear more attractive on a dollar-denominated basis, enticing FPIs back.
- Global Macro Shifts: A more dovish stance by global central banks, particularly the US Fed, leading to lower interest rates and a weakening Dollar, could prompt a reallocation of capital back into emerging markets like India.
- Strong Economic Growth: Continued robust economic growth in India, coupled with improved corporate earnings, could reassert India’s appeal as a long-term investment destination, overriding short-term valuation concerns.
- Policy Reforms: Further government initiatives aimed at boosting manufacturing, attracting foreign investment, and improving infrastructure could enhance investor confidence and draw in fresh capital.
The current situation presents a unique challenge for India’s policymakers. They must navigate the complexities of a robust domestic investment landscape that, while providing market stability, concurrently strains the currency by facilitating foreign capital exits. The path forward will likely involve a combination of prudent monetary management by the RBI and strategic economic policies by the government to ensure that India remains an attractive destination for both domestic and foreign capital, ultimately fostering a stronger, more stable Rupee and a resilient economy. The "downside of SIPs," as identified by Jefferies, serves as a critical reminder that even positive domestic trends can have complex and unforeseen macroeconomic repercussions.
