Domestic Equity Flows Helped Foreign Investors Exit, Says Jefferies

The recent weakness in the Indian rupee has been driven more by weak capital flows than by the current account deficit, according to a note by Jefferies, which said strong domestic investment inflows through mutual fund SIPs enabled foreign investors to exit Indian equities at elevated valuations.

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The brokerage said foreign portfolio outflows linked to equity markets accounted for nearly $78 billion over the last two years. Jefferies noted that robust domestic participation through SIPs, retirement funds and tax-efficient equity investments created liquidity that allowed overseas investors to pare exposure to Indian stocks.

“Not current account deficit (CAD), but all-time low capital flows is the culprit for INR pressure,” Jefferies Managing Director Mahesh Nandurkar said in a note co-authored with Abhinav Sinha and Priyank Shah.

The rupee has depreciated around 7% against the U.S. dollar in calendar year 2026, crossing the 96 mark and emerging among the weakest-performing emerging market currencies during the period.

SIP Inflows Remain Elevated

Data from the Association of Mutual Funds in India (AMFI) showed net inflows into existing equity schemes touched a record ₹38,503 crore in March 2026. Inflows remained largely unchanged at ₹38,410 crore in April 2026.

The earlier peak was recorded in October 2024, when equity schemes received ₹37,840 crore in net inflows.

Jefferies said sustained domestic inflows from SIPs, Employees’ Provident Fund Organisation allocations and National Pension System investments have continued to offset heavy foreign selling in Indian markets.

According to the brokerage, foreign portfolio investors have sold Indian equities worth nearly $44 billion since April 2024.

As a result, India’s capital account surplus dropped to nearly 0.5% during FY25 and FY26, compared with an average surplus of 2.6% over the previous decade.

The brokerage added that India’s balance of payments remained negative over the past two years and may continue to remain under pressure.

CAD Remains Contained

Despite currency weakness, Jefferies said India’s external position remains relatively stable compared with previous depreciation cycles.

The brokerage estimated that India’s current account deficit averaged only 0.8% of GDP during FY24 to FY26, marking the lowest three-year average on record.

For FY27, Jefferies expects the current account deficit to remain below 2% of GDP under its base-case assumptions of crude oil prices averaging $90 per barrel from June onward and a 10% decline in gold imports.

The note also stated that historical trends show foreign portfolio flows have recovered after previous sharp rupee depreciation phases. Jefferies examined four earlier episodes where the rupee weakened more than 10% over a 12-month period and found that foreign inflows improved in three of those cases during the following year.

The brokerage added that a moderation in artificial intelligence-led global investment themes and changes in energy market conditions could influence future capital flows into emerging markets, including India.