Strong SIP inflows behind rupee weakness: Jefferies

The sharp fall in the Indian rupee over the past few months has largely been driven by strong domestic inflows through systematic investment plans (SIPs), which provided an exit route for foreign investors seeking to cash out of India’s expensive equity market, according to a recent note by Jefferies.

The brokerage said that a potential correction in valuations, unwinding of the artificial intelligence (AI) trade, and reopening of the Strait of Hormuz for smoother business activity could help reverse the ongoing foreign outflows.

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“Not current account deficit (CAD), but all-time low capital flows is the culprit for INR pressure. Equity market driven outflows accounted for $78 billion over the last two years, as strong domestic flows provided an easy exit to foreign capital escaping an expensive market,” wrote Mahesh Nandurkar in a co-authored note along with Abhinav Sinha and Priyank Shah.

According to data from the Association of Mutual Funds in India (Amfi), net inflows into existing equity schemes rose to a record ₹38,503 crore in March 2026 and remained largely steady at ₹38,410 crore in April 2026. The previous record was logged in October 2024, when existing schemes attracted net inflows of ₹37,840 crore.

So far in calendar year 2026, the rupee has depreciated around 7 per cent against the US dollar, crossing the 96 mark and emerging as one of the worst-performing emerging market currencies during the period.

Jefferies’ analysis of four previous episodes of sharp rupee depreciation — defined as more than 10 per cent decline over a 12-month period — showed that foreign portfolio investor (FPI) flows witnessed a strong rebound in three of those instances over the following year.

Meanwhile, FPIs have sold a net $44 billion worth of Indian equities since April 2024, according to Jefferies estimates. As a result, India’s capital account surplus has slipped to around 0.5 per cent during FY25-26, the lowest on record, compared with an average surplus of 2.6 per cent over the previous decade.