Recent policy interventions by the Reserve Bank of India (RBI) and the government have helped ease pressure on the Indian rupee, but structural risks linked to global capital flows and prospective US monetary tightening continue to cloud the currency’s outlook, according to a report by Elara Securities.
The brokerage said FY27 is likely to be a “tale of two halves” for the rupee. In the first half of the fiscal year, lower current account pressures and improving capital inflow prospects are expected to support the currency, with the USD-INR pair likely to remain in the 93-95 range. However, anticipated US Federal Reserve rate hikes in the second half could reignite stress across emerging market currencies and limit any further appreciation in the rupee.
According to Elara, policymakers have adopted a three-track strategy to stabilise the currency, including foreign exchange market interventions, tax incentives for foreign investors in government securities, and measures aimed at attracting debt-related foreign currency inflows such as FCNR(B) deposits and support for PSU external commercial borrowing hedging costs.
Debt Inflows Gather Momentum
The report highlighted the impact of the government’s decision to make investments in Indian government securities tax-free for foreign portfolio investors (FPIs). Following the policy announcement on 5 June, FPI inflows into Indian debt under the Fully Accessible Route (FAR) surged to USD 1.7 billion in ten trading days, compared with USD 229 million in the ten trading days preceding the announcement.
Elara estimates that debt market reforms and the potential inclusion of Indian bonds in the Bloomberg Global Bond Index could together attract USD 80-85 billion in inflows.
Fed Tightening Could Cap Rupee Gains
Despite the near-term relief, the brokerage remains cautious about developments in the United States. Elara expects the US Federal Reserve to raise rates by a cumulative 75 basis points through three hikes beginning in September 2026, as policymakers remain focused on controlling inflation.
A stronger US dollar, supported by tighter monetary policy and resilient US growth, could put renewed pressure on emerging market currencies, including the rupee.
Global Capital Shifts Challenge India
The report also warned that higher US interest rates could weigh on foreign portfolio investment into Indian equities. Citing EPFR data, Elara noted that USD 120 billion flowed into US equities during the week ended 19 June 2026, driven by exchange-traded funds and continued investor enthusiasm around artificial intelligence-related opportunities.
At the same time, approximately USD 8.5 billion has been withdrawn from India-focused funds this year as investors redirected capital towards AI-linked opportunities in markets such as Taiwan and South Korea.
Shrinking FDI Pool Remains Structural Concern
Beyond near-term currency dynamics, Elara identified declining global foreign direct investment (FDI) flows as a key structural challenge. Global FDI inflows have fallen from a peak of USD 2.21 trillion in 2015 to around USD 1.5 trillion, while flows into developing Asia declined 3 per cent year-on-year in 2024.
The report noted that geopolitical tensions, supply-chain realignments and a growing concentration of investments in technology sectors, particularly semiconductors, are reshaping global capital allocation patterns.
Elara concluded that while recent policy measures have significantly reduced immediate concerns around funding India’s current account deficit, sustaining long-term capital inflows will remain crucial as global investment flows become increasingly competitive and concentrated in a handful of markets and sectors.
