Undervalued Rupee Could Attract Foreign Investors Back to Indian Markets, Say Brokerages

Indian Rupee Weakness Persists, but Analysts See Undervaluation Creating a Long-Term Opportunity

The Indian rupee’s persistent slide continues to dominate macro discussions as the currency hit fresh record lows in recent sessions, briefly breaching the ₹90-per-dollar mark for the first time. While the rupee’s weakness has added to short-term volatility in equities, two brokerages now suggest a counterintuitive trend: the currency’s undervaluation could eventually draw foreign investors back to Indian stock markets.

The rupee opened at ₹90.41 per dollar on December 4 but later recovered slightly to trade near ₹90.11, reflecting ongoing pressure driven by volatile crude oil prices, global risk aversion, and steady foreign outflows. Despite this, analysts argue that the worst of the currency decline could sow the seeds for renewed foreign interest.

Near-Term Outlook: Rupee Likely to Stay Weak as Global Conditions Remain Uncertain

Experts believe that the rupee’s underperformance is unlikely to reverse immediately. According to Rahul Gupta, CBO at Ashika Group, the currency will likely trade in the ₹89.50–₹91.20 range in the near term, especially if crude oil prices stay firm and FII risk appetite remains subdued.

Gupta noted that a meaningful recovery would require:

• A revival in foreign portfolio inflows

• Clear visibility on global rate cut cycles

• Improvement in India’s export momentum

• Continued RBI intervention to prevent disorderly depreciation

Echoing this sentiment, Amit Pabari, Managing Director at CR Forex Advisors, said the rupee’s breach of the 90-mark signals ongoing downward pressure. He added that the currency pair could drift toward the ₹90.70–₹91 zone, indicating that short-term volatility is far from over.

Also Read : Sensex Pulls Back 200 Points and Nifty Slips Below 26,050: What Triggered the Market Decline

Persistent FII Selling Creates Market Headwinds

This year has seen foreign portfolio investors remain net sellers of Indian equities, with outflows amounting to nearly $17 billion, according to Reuters. Rising US yields, geopolitical tensions, and the rupee’s volatility have all contributed to investor caution.

However, some analysts believe that continued depreciation may trigger a reversal in behaviour. Historically, valuation gaps created by currency weakness have attracted long-term foreign investors seeking relative value in emerging markets.

Brokerages Highlight Rupee Undervaluation Through REER Lens

Two domestic brokerages — Elara Capital and Yes Securities — have highlighted that the rupee is now deeply undervalued when measured against its Real Effective Exchange Rate (REER), which adjusts for inflation and trade-weighted currency competitiveness.

Elara Capital noted that the rupee is currently at its most undervalued level since October 2018, based on a 40-country trade-weighted REER basket. The brokerage said the REER reading of 97.47 places the currency less than one standard deviation below its historical mean, a zone typically associated with the beginning of future foreign inflows.

Their research suggests that equity inflows tend to pick up with a lag of one to two quarters after the REER bottoms out. This implies that India may see improved foreign inflows sometime in mid–2025, particularly if domestic earnings growth and nominal GDP growth remain robust.

Elara expects consumption and credit growth to strengthen through mid-CY26, supported by potential rate cuts from the Reserve Bank of India. “A pick-up in nominal growth along with earnings momentum is a key factor for the return of foreign capital flows,” the brokerage said.

Yes Securities Agrees: Foreign Investors Gain Confidence When INR Undervalued

Yes Securities also reiterated that the rupee’s undervaluation on a REER basis provides comfort to FIIs, who remain highly sensitive to currency swings. According to the brokerage, foreign inflows tend to accelerate when the rupee’s depreciation exceeds its long-term average.

This year, the rupee has already fallen 4.5%, which is notably higher than the 25-year annual average depreciation of 3%. Historically, such deviations have often preceded renewed interest from global investors, especially when India’s growth fundamentals remain strong despite currency weakness.

Market Reaction Mild Despite Rupee Volatility

Despite the sharp movements in the currency market, Indian equities traded mostly stable on Wednesday afternoon. At around 1 pm, the Sensex was up 65 points (0.08%) at 85,156.61, while the Nifty gained 19 points (0.07%) to 26,004.80.

The muted reaction reflects a market attempting to look past short-term pressures, focusing instead on the potential for longer-term inflows should the rupee stabilize at undervalued levels.

Is Rupee Weakness a Blessing in Disguise for Foreign Investors?

For global investors, an undervalued currency often presents an entry opportunity, especially in high-growth markets like India. Key factors that could attract fresh inflows include:

1. Attractive Valuations in Dollar Terms

As the rupee weakens, Indian equity valuations become cheaper in dollar terms, improving the entry point for long-term investors.

2. Strong Domestic Growth Outlook

India’s growth trajectory remains one of the strongest globally, supported by broad-based recovery in consumption, credit expansion and capex cycles.

3. Expected Policy Support

Rate cuts in the coming quarters could further uplift corporate earnings and reduce cost of capital.

4. Stabilizing REER Levels

Once the REER bottoms and reverses, it typically leads to renewed institutional participation.

Looking Ahead: Will the Rupee Attract or Repel Foreign Investors?

In the immediate future, the rupee is likely to remain under pressure, driven by crude prices and global macro uncertainty. However, the degree of undervaluation highlighted by brokerages suggests that India may be approaching an inflection point where foreign investors start revisiting domestic equities with renewed interest.

If earnings momentum remains intact and volatility subsides, the undervalued rupee may indeed become a strategic catalyst for foreign inflows, rather than a deterrent.

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