Rupee Stability Could Hold the Key to Sustained FPI Flows Into India, Jefferies Says

Foreign portfolio investors have started returning to Indian markets after an extended period of selling, but the durability of those flows may depend as much on the rupee as on the gap between Indian and US bond yields. 

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Jefferies India country head Aashish Agarwal has flagged currency stability as an important factor for foreign investors at a time when US Treasury yields remain elevated. The 10-year US Treasury yield was around 5%, while the 30-year yield was close to 5.35% at the levels cited in the report. 

Higher US yields can make Indian debt relatively less attractive. For equity investors, the effect is less direct, with currency movements becoming an important part of returns for overseas investors. 

FPI flows improve after prolonged selling 

Foreign investor sentiment towards India has improved over the past three months. 

FPIs have recorded net inflows of $5 billion since mid-June, following sustained selling over the previous two years. 

Jefferies’ assessment is that a sharp depreciation in the rupee could again complicate foreign flows. India’s foreign-exchange reserves therefore become important in limiting abrupt currency moves. 

The brokerage also sees earnings growth as part of the equation. Sustained foreign participation would require the gap between India’s earnings growth and that of other emerging markets to narrow. 

Market leadership is beginning to broaden 

The composition of India’s growth story is also changing. 

Financial services, technology services and consumer staples—sectors that traditionally carry substantial weight in foreign portfolios—had seen slower growth, which Jefferies identified as one reason behind earlier foreign selling. 

As growth in these businesses moves closer to GDP levels, infrastructure, power, real estate, hospitals and hotels could take a larger share of market growth and eventually index weights. 

Several of these sectors are currently recording growth of 20-25% or more, according to the figures cited in the report. 

This shift is occurring after Korea and Taiwan gained weight in emerging-market portfolios while India’s share declined. 

M&A and equity-market activity remain active 

Jefferies is also seeing a strong pipeline of mergers and acquisitions and equity capital-market transactions in India. 

Domestic mutual funds are currently an important source of demand for IPOs, while global strategic investors and private equity firms have a larger presence in merger and acquisition activity. 

For Jefferies itself, investment banking and equities remain its main areas of focus in India. The firm does not operate a commercial bank or pursue wealth management globally. 

It may, however, consider opportunities in wealth or asset management in India if a suitable opportunity emerges. No timeline has been specified. 

For foreign investors assessing India, the immediate picture therefore extends beyond headline interest-rate differentials. Recent inflows have improved after a long period of selling, but the rupee, relative earnings growth and the changing mix of sectors contributing to market growth remain central to Jefferies’ assessment of whether those flows can continue.