- The Indian Rupee faces a capital inflow problem, and has become much more dependent on volatile foreign portfolio inflows than in the past: What is different for the Indian Rupee this cycle has been a drying up of foreign capital inflows. Importantly this is happening despite strong reported real GDP growth, low and contained inflation, and a current account deficit within historical comfort levels. Some of this reflects headwinds such as a lack of clarity on tariffs, which should hopefully resolve over time. More crucially, India’s net direct investment position has swung from a US$40bn inflow a couple of years back to essentially zero today, creating a hole in India’s balance of payments which must be filled in other ways (see Chart 1 below). This has made INR far more dependent on volatile foreign portfolio inflows to finance its current account deficit, and as such leading to pressure on INR to weaken with greater swings.
- Foreigners are taking profits on existing investments with the strong IPO market and the private equity/VC exit cycle, leading to increasing outflow pressure on INR. Our analysis that shows one important contributor to Indian Rupee weakness has been the strong IPO market in India, with rising exits from PE/VC funds taking profits on existing investments, while also reflected in increasing gross FDI repatriation. A continued valuation premium between India and other markets likely plays some role here, while the lack of direct AI-related plays in India relative to other markets in Asia might also be a factor as well.
- Moving forward, we forecast gross FDI repatriation to remain elevated with a very strong IPO pipeline in 2026. Indications from public estimates and corroborated by our own bottom-up compilation suggests IPO issuance could rise to between US$20-25bn in 2026 from US$20bn last year, and with sale of shares by existing investors (so-called “offer-for-sale”) likely to remain elevated. This FX outflow should offset some expected chunky inward FDI inflows in sectors such as finance, which we have already factored into our forecasts.
- Beyond FDI, we have lowered our forecasts for foreign portfolio inflows, reflecting a delay in a trade deal between the US and India. We have now pushed out our expectation for a lowering of India’s tariffs to 2H2026, from our earlier assumption of early 2026.
- From a FX perspective, we now forecast USD/INR rising towards 92.00 by 3Q2026, from our previous expectation of 90.80. This implies continued INR underperformance against key G10 and Asia FX crosses, but with the pace of INR weakness slowing relative to last year given much cheaper FX valuations.
- From a rates perspective, we continue to think RBI is at the end of the rate cutting cycle, and we forecast an extended hold in the repo rate at 5.25%. Capital outflows, FX intervention to cap INR weakness, coupled with elevated state government borrowing are hindering transmission of RBI’s rate cuts to the broader interest rate structure. We foresee RBI injecting more INR liquidity through OMOs purchases and USD/INR FX buy/sell swaps through 2026.
Flows before growth for the Indian Rupee
- The Indian Rupee has endured a difficult and more volatile spell over the past 18-24 months, with USD/INR rising sharply towards the 88 handle in Feb 2025, before aggressive RBI intervention and a change in the FX flow dynamics brought it down towards the 84 handle in May 2025. Since then, USD/INR has been on an upward trend, and despite FX intervention by RBI to cap INR weakness to the tune of more than US$40bn in 2H2025 and even more through the FX forward market around October 2025, USD/INR has broken above 90 and is now hovering around those levels.
- Part of the USD/INR moves reflect a change and evolution in FX intervention strategy by RBI since Governor Sanjay Malhotra started his tenure, with a greater tolerance for two-way swings even as RBI has come in at key levels aggressively such as during February and October 2025 to push back against speculative pressure (see INR – Let it go? A weaker outlook for 2025).
- More importantly, the FX flow dynamics for INR has thus far remained unbalanced and tilted towards outflows. This reflects a widening of India’s current deficit with higher import needs, coupled with still weak capital inflows driven by a lack of clarity on tariffs and the possibility of a trade deal between the US and India (see What ails INR? Balance of payments remains unbalanced).
- In this report, we focus on the dynamics of financial inflows for the Indian Rupee. In particular we zoom in on how the swing in India’s gross FDI repatriation outflows from around US$20bn per year in 2021, up to US$40bn per year in 2025 goes some way to explain why India’s net direct investment has essentially moved closer to zero, and has made India’s balance of payments much more dependent on volatile foreign portfolio inflows in this cycle (see Chart 6 below). We have talked about this in past reports through 2025, and we provide more details and analysis and crucially forecast the path forward in 2026 (see INR – Let it go? A weaker outlook for 2025 and What ails INR? Balance of payments remains unbalanced). There are other aspects which are important of course including inward FDI and the rise in resident direct investment outflows, but we leave that topic for another report.
- Our analysis shows that the sharp rise in FDI repatriation from India can be largely attributed to the private equity/VC exit cycle in India. First, India’s equity market deal values including through the IPO market correlates very well with changes in gross FDI repatriation historically (see Chart 7 above). Second, from an FX market perspective, USD/INR has moved in tandem with changes in India’s equity market deal values. This also includes the period from February to May 2025 when USD/INR moved sharply lower towards the 84 levels as deal value announcements fell, likely due to the equity market uncertainty around Liberation Day (see Chart 8 above). Third, PE/VC activity data corroborates these trends by showing a sharp rise in exits from India especially since the pandemic, and also interestingly with India’s exits activity overtaking other key markets in Asia such as China (see Chart 10 below).
- Importantly, our analysis shows this strong IPO exit activity in India can continue, and this will as such put some further pressure on the Indian Rupee to weaken through 2026 from an FX perspective. First, publicly available estimates of the pipeline of IPOs in India suggests it could range between US$20-25bn in 2026, compared with US$20bn in 2025, according to various investment banks. Second, our bottom-up compilation of possible deals based on information in the public domain corroborates this figure, suggesting that these companies could be looking to raise a total around US$22bn through 2026. Third, data compiled by Prime Database shows deals worth US$13bn have already been approved by the regulator, with another US$16bn in the pipeline for a total of around US$30bn – a strong pipeline overall. Of course not all of these will come to the market and it will also depend on market conditions, but the broader point we make on the strong IPO pipeline for 2026 still stands.
- Valuation premiums between India and other markets, more direct AI-related plays outside of India, coupled with continued strong domestic liquidity conditions are key drivers. An important question from an FX perspective is why are foreign investors not recycling and reinvesting their profits within India, but instead choosing to take their money out and cashing in on their profits. We think continued valuation premiums between India and other markets is likely a key driver. While India’s equity market has always been expensive historically, the valuation premium continues to be quite elevated relative to India’s own history especially post-pandemic (Chart 11 below). In addition, the lack of AI-related plays in India relative to other markets including across Asia might also be a factor. While India’s earnings are generally expected to improve, other markets with perhaps more direct AI-related plays such as South Korea show stronger earnings improvement potential through 2026, and makes India look somewhat less attractive from a relative perspective (see Chart 13 below).
We forecast USD/INR to move towards 92.00, and FX forward premia to stay elevated. RBI to keep repo rate at 5.25% and inject more liquidity
- Putting it all together from an FX perspective, we forecast USD/INR spot to move towards 92.00 over time. Our forecast implies continued underperformance of spot INR against key FX crosses including EUR, CNY and JPY, but importantly also for the pace of weakness to slow relative to last year.
- Over the near-term, the outcome of tariff negotiations between US and India will be a key market driver. We expect a trade deal to eventually be reached, but importantly we have pushed out the timing of a deal to 2H2026 instead of our previous expectation of early 2026. The upcoming Supreme Court ruling on the legality of Trump’s usage of IEEPA could be a near-term uncertainty, but over here we think the Trump administration will try to replicate India’s existing tariffs with alternative legal authority.
- From a portfolio inflow perspective, we have accordingly lowered our forecast especially for the equity market reflecting this change in tariff assumption. Foreign inflows into India’s bond market could also be slow to improve given uncertainty around the pace of fiscal consolidation by the central government, coupled with sticky and elevated state government borrowing needs. The delay by Bloomberg to add Indian Government Bonds to the Global Aggregate Index is also another near-term headwind, which if announced could have added around US$15-20bn of inflows over time. The upcoming Union Budget for FY2026/27 to be announced on 1 February 2026 will be important in this regard for FX and rates markets.
- We are also forecasting gross FDI repatriation to remain elevated and to rise slightly this year relative to 2025, and as such offsetting some chunky inward FDI expected in some sectors such as in financial services. Our analysis above detailing the strong IPO pipeline and profit-taking by foreign investors supports this, and should put some pressure on INR through 2026.
- Looking more broadly, we think USD/INR FX forward permia should remain elevated, but will unlikely revisit the dislocated levels seen in December 2025 absent sharp FX outflows.
- From a rates perspective, we continue to think RBI is at the end of the rate cutting cycle, and we forecast an extended hold in the repo rate at 5.25%. Capital outflows, FX intervention to cap INR weakness, coupled with elevated state government borrowing are hindering transmission of RBI’s rate cuts to the broader interest rate structure. We foresee RBI injecting more INR liquidity through OMOs purchases and USD/INR FX buy/sell swaps through 2026.
- From a structural perspective, with FX valuations already far cheaper now and moving towards weak levels last seen during the 2013 taper tantrum, we remain hesitant to be overly bearish on INR (see Chart 16 below). India’s external and internal macro stability is in a far better place compared with the past decade, with lower FX debt and mismatches, higher FX reserves, lower inflation rates, stronger corporate and banking sector balance sheets, coupled with the implementation of structural reforms such as the digital stack and GST, among other positives. Our analysis of rising private equity/PE exits is not a bad thing in totality, as it also reflects a deep domestic capital market. Of course elevated valuations raise the bar for further improvement in India, and places greater impetus for policymakers to accelerate structural reforms. All this is not to say that everything is good and India does punch below its weight and its potential in several aspects, including areas where India lags behind the rest of the world such as labour-intensive manufacturing. This is a topic we will attempt to revisit in due course in subsequent reports.
