The rupee’s recent weakness may have less to do with India’s trade balance and more to do with what has been happening inside the equity market. According to Jefferies, strong domestic inflows through Systematic Investment Plans and other local investment channels have absorbed sustained foreign selling over the past two years, allowing overseas investors to exit Indian equities at scale without causing a sharper market correction.
The brokerage estimated equity market-driven outflows at $78 billion across FY25 and FY26, including net foreign portfolio investor selling of $44 billion since April 2024. That erosion in capital inflows, rather than stress in the current account deficit, has become the main source of pressure on the Indian currency and has pushed the balance of payments into negative territory for two consecutive years, Jefferies said.
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Jefferies said “strong domestic flows provided an easy exit to foreign capital escaping an expensive market” and added that the result was back-to-back years of negative balance of payments despite a relatively contained current account position. The brokerage said another year of pressure remained possible unless global capital trends turned more supportive.
Jefferies says current account remains manageable even as rupee comes under pressure
Jefferies said the current account is not showing the kind of stress typically associated with sharp currency weakness.
The brokerage estimated that India’s current account deficit averaged 0.8% of gross domestic product across FY24 to FY26, the lowest level recorded, and expected FY27 to remain contained within 2% of gross domestic product. Jefferies said its assumptions included crude oil at US$90 per barrel and lower gold imports after recent policy measures.
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“Current account deficit still manageable at around 2% of GDP. In the last three years (FY24-26), India’s current account deficit has averaged at 0.8% of GDP, the lowest ever. We expect FY27 CAD to still remain well contained within 2% of GDP, still quite reasonable,” Jefferies said in the report.
Jefferies says FII exits have become the bigger source of pressure
Jefferies said the capital account has emerged as the bigger concern.
The brokerage estimated that net foreign direct investment remained near -$5 billion across FY25 and FY26 as promoter sell-downs and private equity exits weighed on inflows. Foreign portfolio investors sold Indian equities worth a net$44 billion since April 2024, according to the report.
Jefferies said capital account surplus fell to around 0.5% of gross domestic product during FY25 and FY26 compared with 2.6% over the previous decade and said domestic inflows continued absorbing foreign selling.
“Strong MF flows thanks to SIPs and tax advantage for equity investments, higher equity allocation by EPFO and NPS link continue to absorb heavy foreign selling in equity markets,” Jefferies said.
Jefferies says services exports continue to offset part of the pressure
The brokerage said external balances still have support from India’s services engine.
Jefferies estimated net services exports rose 14% year on year to $217 billion in FY26 and covered nearly 65% of the trade deficit. The report also said Global Capability Centre activity continued to show momentum despite concerns linked to artificial intelligence.
“Trade deals, GCCs offer a partial offset,” Jefferies said while cautioning that India’s exposure to the Middle East through exports and remittances remained an area to watch.
Jefferies sees room for rupee recovery from current levels
Looking at previous depreciation cycles, Jefferies said foreign portfolio flows recovered in three out of four episodes during the following twelve months.
The brokerage said the Real Effective Exchange Rate stood at around 91 and described that level as roughly 9% undervalued. Adjusted foreign exchange reserves remained substantial at US$597 billion and translated into around nine months of import cover.
“REER shows INR undervalued,” Jefferies said, adding that it expected the rupee to move toward 93 to 95 against the US dollar over the next twelve months,assuming Hormuz opens soon.
Conclusion
Jefferies’ reading of the rupee’s weakness is that the pressure is coming from an unusual place. Unlike earlier periods marked by widening current account deficits, the brokerage said this phase is being driven by a prolonged slowdown in capital inflows even as domestic savings continue supporting equity markets.
The report argued that strong Systematic Investment Plan inflows, tax incentives for equity ownership and institutional allocations absorbed heavy foreign selling and prevented a sharper market correction, but also allowed overseas capital to exit at scale. At the same time, the brokerage did not present the current phase as irreversible. “Past INR depreciation episodes show turnaround possibilities from here,” Jefferies said, while maintaining that the direction of global capital flows will remain central to what happens next.
Disclaimer: The macroeconomic analysis and currency projections discussed in this report are based on institutional research data and do not constitute direct investment advice, forex trading recommendations, or financial advisory guidelines for retail investors. While strong domestic institutional flows and Systematic Investment Plans (SIPs) continue to support the equity ecosystem, cross-border capital flows and foreign exchange rates remain subject to significant macroeconomic and geopolitical risks. Readers are advised to consult a qualified financial advisor or SEBI-registered professional before making investment decisions based on currency or market forecasts. This disclaimer has been generated using AI to support user well-being and responsible content consumption.
TOPICSFalling Rupee ValueFIIfiisForeign Institutional Investor (FII)rupeeRupee vs us dollar + 0 MoreThis article was first uploaded on May twenty-two, twenty twenty-six, at fifty-five minutes past six in the morning.