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Jefferies says the rupee is Asia’s most undervalued in 2026, blaming heavy FPI equity selling offset by strong SIP driven domestic inflows.
With weaker foreign inflows, India’s balance of payments has remained in deficit for the past two years, and Jefferies expects another soft year ahead.
India’s rupee has remained the most undervalued currency in the Asia region in 2026 so far, falling over 9 per cent to a record low of 96.96 against the US dollar.
The International brokerage Jefferies, in its latest report say the major reason behind the pressure on Indian currency is linked with heavy foreign selling in Indian equities, supported by strong domestic inflows.
In a note tiled “INR Pressure – The Downside of SIPs” add that the Indian rupee’s recent weakness has less to do with oil prices or the current account deficit and more to do with domestic investors relentlessly buying equities through SIPs.
According to Jefferies estimates, a total of $78 billion of Indian equities was sold by FIIs, private equity firms and foreign promoters over the past two years.
It added that they used strong domestic liquidity to pare holdings in what many view as an expensive market.
“Strong domestic inflows gave foreign investors an easy route to exit an expensive Indian market,” Jefferies said. The brokerage highlighted that the scale of selling by foreign portfolio investors (FPIs) has been massive. FPIs sold a record $21 billion worth of Indian equities in FY26 and have continued to remain net sellers so far in FY27. Since April 2024, net FPI outflows from Indian equities have reached $44 billion.
The brokerage highlighted that despite massive outflow of FIIs, domestic benchmark indices haven’t fallen proportionally, thanks to domestic institutions and retail investors. They invested in the equity market through systematic investment plans (SIPs), mutual fund inflows and rising equity allocations from EPFO and NPS-linked investments.
Jefferies believes the trend of strong domestic inflows absorbing foreign selling has also hurt India’s capital account strength.
According to the brokerage, India’s capital account surplus dropped sharply to nearly 0.5% of GDP in FY25 and FY26 combined — the weakest level on record — compared with the average surplus of 2.6% seen over the previous decade.
Foreign direct investment (FDI) flows also stayed subdued at around $5 billion during the two-year period, as promoter stake sales and private equity exits weighed on inflows.
With weaker foreign inflows, India’s balance of payments has remained in deficit for the past two years, and Jefferies expects another soft year ahead.
Despite this, the brokerage sees the possibility of a turnaround. It pointed out that in three of the last four instances when the rupee weakened by over 10% in a 12-month span, foreign portfolio investor (FPI) inflows recovered sharply in the following year.
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