The Indian rupee’s recent decline may not be solely due to rising oil prices or current account deficit concerns but also due to significant domestic equity inflows, as per a report by Jefferies. The brokerage highlighted that sustained foreign selling in Indian equities, alongside robust domestic liquidity, is a key factor impacting the rupee. Over the past two years, equity market-driven outflows have totaled nearly $78 billion, with foreign investors reducing holdings amidst strong domestic demand.
Jefferies pointed out that despite foreign portfolio investors (FPIs) selling a record $21 billion of Indian equities in FY26 and remaining net sellers in FY27, benchmark equity indices have remained relatively stable. This stability is attributed to steady SIP inflows, rising allocations from EPFO and NPS-linked investments, and support from domestic institutional investors and retail participants. However, the trend has weakened India’s capital account position, with the capital account surplus dropping to around 0.5 per cent of GDP during FY25 and FY26.
The report also highlighted that net foreign direct investment remained subdued at nearly $5 billion over the same period, partly due to stake sales by promoters and private equity investors. Consequently, India’s balance of payments has been negative for the past two years, with Jefferies anticipating another challenging year ahead. Despite this, the brokerage remains optimistic, suggesting that a reversal in the situation could occur if foreign investor sentiment improves. Jefferies noted that historically, FPI inflows rebounded strongly in the year following significant rupee depreciation.
