India's Currency Conundrum: How the Rupee's Slide is Impacting Investments

India's Rupee Hits New Lows Despite Weakening Dollar Index

The Indian rupee is taking a different path from global currency trends, hitting new lows even as the dollar index weakens. This is mainly due to significant foreign capital outflows from India's bond market. At the same time, Indian stocks are struggling to compete with their North Asian counterparts, which are showing stronger earnings and currency stability.

Understanding the Situation

Anindya Banerjee, Head of Currency & Commodity Research at Kotak Securities, explained the situation on CNBC TV18. He said that the US bond yields have increased, leading to outflows from the Indian bond market. Foreign portfolio investors (FPIs) have pulled out around $2.5 billion from Indian debt and equity markets in December alone, which is the main factor affecting the rupee.

Banerjee noted that the Reserve Bank of India (RBI) is intervening, but it needs to act more decisively to prevent a further slide. The central bank seems comfortable with a gradual depreciation, as low domestic inflation allows it to use a weaker currency to support the export sector in a trade war environment.

Impact on Foreign Investor Sentiment

This currency headwind is a critical factor influencing foreign investor sentiment towards Indian stocks. Market strategist Manishi Raychaudhuri, CEO of Emmer Capital Partners, highlighted the comparison between India and the rest of Asia. He said that only interest rates have been in India's favor, while earnings and currency have not.

Raychaudhuri emphasized the growing appeal of North Asian technology stocks, such as South Korean chipmakers like SK Hynix and Samsung Electronics, over Indian IT services. He suggested that these companies offer a cheaper entry into the artificial intelligence theme compared to their US counterparts.

Investment Strategy for 2026

Looking ahead to 2026, Raychaudhuri revealed a nuanced investment strategy. His firm has moved to a marginal overweight on India within its Asia ex-Japan portfolio, alongside overweight positions in Hong Kong, China, and Korea.

Within India, he favors several sectors, including:

• Private sector banks, whose outperformance is just beginning to set in
• Consumer discretionary stocks, including autos and healthcare chains
• Select conglomerates, like Reliance Industries, which recently saw an earnings upgrade
• Industrials, holding stocks like Larsen & Toubro and Adani Ports, due to the sustained government focus on infrastructure and a global infrastructure boom
• Defence, a long-term theme that will gain prominence amid geopolitical tensions