India’s rupee has stepped back from the brink in recent weeks, helped by cooling geopolitical risks and an aggressive policy push to draw foreign money into government debt. However, experts believe the currency’s relief rally masks deeper structural vulnerabilities that could re‑emerge once the next US rate‑hike cycle gets underway and global foreign direct investment (FDI) continues to shrink.
According to research house Elara Securities’ latest assessment, FY27 is likely to be “a tale of two halves” for the US dollar–Indian rupee (USD/INR) pair. In the first half, as current account pressures ease and debt inflows pick up, the brokerage expects the rupee to trade with an appreciation bias, broadly oscillating in a 93–95 band on its proprietary effective index.
Near‑term stress has already faded thanks to easing tensions in the Middle East and coordinated Reserve Bank of India (RBI) and government measures to attract foreign portfolio investors (FPIs) into domestic bonds.
However, Elara warns that the second half of FY27 could prove more challenging. It expects the US Federal Reserve, under chair Kevin Warsh, to deliver three 25‑basis‑point rate hikes between September 2026 and January 2027 as it tries to force inflation back to its 2 per cent target in an economy still growing near trend with unemployment around its non‑accelerating inflation rate of unemployment (NAIRU).
A firmer dollar, driven by higher US yields and relative weakness in currencies such as the euro, yen and pound, could cap any rupee gains and re‑ignite pressure on broader emerging‑market currencies.
Policy blitz: tax‑free G‑secs and debt inflows
The immediate stabilisation of the rupee owes much to a three‑pronged policy response over the past few months, experts note. First, the RBI moved to stabilise the foreign‑exchange market through tighter limits on banks’ net open positions, action against offshore non‑deliverable forwards, calibrated gold duty hikes and spot‑swap operations.
Second, New Delhi revamped the tax and regulatory framework for government securities, expanding the list of bonds under the Fully Accessible Route (FAR), removing several quantitative limits for FPIs and, crucially, exempting FPIs from income tax and capital gains tax on G‑sec investments via a June 5 ordinance.
That change has already triggered a sharp rebound in FPI debt flows. Elara estimates that FPIs have channelled around USD 1.7 billion into Indian government bonds via the FAR route in the 10 trading days following the RBI’s June 5 policy meeting, compared with just USD 229 million in the 10 days before. It also points to the possibility of India’s inclusion in the Bloomberg Global Aggregate or similar global bond indices, which could together drive USD 80–85 billion of incremental foreign debt inflows over time.
Third, the authorities have tried to lower the cost and increase the attractiveness of foreign‑currency borrowing by banks and public‑sector undertakings, in part through incentives linked to FCNR(B) deposits and external commercial borrowings (ECBs).
Taken together, these moves are designed to ensure India can comfortably fund a still‑sizeable current account deficit without having to burn through forex reserves.
ALSO READ | Oil prices cool, but OMCs may still face a profit hit in Q1 FY27
Strong dollar, weak flows: headwinds from Wall Street
Even as India shores up its bond market, the outlook for equity flows looks far less benign. Elara highlights EPFR data for the week ending June 19, 2026, showing an “unprecedented” USD 120 billion flowing into US equities in just one week, largely channelled through exchange‑traded funds, as global investors crowd into America’s artificial‑intelligence and technology leaders.
With the dollar index at a one‑year high and AI‑linked optimism concentrating around US innovators, capital is rotating back into the US at the expense of many emerging markets.
India, experts argue, has effectively become a “funding source” for this rotation. Redemptions from India‑dedicated funds have accelerated since the start of 2026 as investors reallocate towards AI‑heavy markets such as Taiwan and South Korea.
By Elara’s estimate, about USD 8.5 billion has already been pulled out of India‑focused equity funds this year, with much of the money leaving Luxembourg‑ and Japan‑domiciled vehicles. This weak FPI equity backdrop could limit how far the rupee can strengthen, even if debt inflows stay strong.
Shrinking global FDI: A deeper structural problem
Experts are more worried about the longer‑term picture for the rupee, which they link to the health of global FDI flows. According to Elara, India is increasingly relying on short‑term debt and portfolio flows to plug its external funding gap just as the world’s FDI engine is sputtering.
Equity outflows, in the form of profit repatriation and stake dilution, have risen to an estimated 33 per cent of India’s gross equity FDI in FY26, more than double the 14.6 per cent share seen in FY20, implying that net retained FDI is shrinking.
This is happening against a backdrop of rising geopolitical risk, supply‑chain re‑shoring, and an intense global technology race that is pulling capital towards a few advanced hubs.
According to UNCTAD, global FDI fell 11 per cent to USD 1.5 trillion in 2024, the second straight annual decline from a peak of about USD 2.2 trillion in 2015. Developing Asia saw a 3 per cent year‑on‑year drop, and project finance into traditional infrastructure slumped 14 per cent, even as tech‑sector commitments — especially in semiconductors — surged by around 140 per cent. The US remained the single largest FDI recipient in 2024 with inflows of about USD 279 billion.
Elara warns that in such an environment, India’s ability to attract “durable” FDI into manufacturing and services – the kind of capital that supports long‑term rupee stability – could come under pressure in FY28 and beyond, even if shorter‑term bond flows look healthy in FY27. That, in turn, heightens the importance of domestic reforms aimed at improving the business climate, speeding up clearances, and deepening local capital markets.
Policy comfort now, vigilance later
For now, most large brokerages and international banks agree that the worst of the immediate rupee stress has passed, helped by the policy reset on G‑sec taxation and strong reserve cover. But Elara’s assessment underscores that this comfort is largely cyclical and debt‑driven.
As the Fed resumes tightening and global capital chases higher US yields and AI‑linked opportunities, India may find equity inflows harder to come by and FDI less plentiful, leaving the rupee more exposed to swings in sentiment.
In short, the near‑term risks to the rupee have been capped, but the currency still faces “structural challenges” that only sustained improvement in productive, long‑term capital inflows can resolve.
