Indian rupee has been under severe selling pressure lately thanks to the rising geopolitical tensions, which has pushed the crude oil prices higher and consistent FIIs selling, adding to the demand for the US dollar. Rupee had hit its record low last week turning into the worst performing Asian currency this year. However, DSP Mutual Fund believes that things have changed now.
DSP Mutual Fund has said the Indian rupee is at one of its most competitive levels in recent years, with support coming from valuation, inflation and external account trends. In a report on the currency, the fund argued that the rupee’s trade-weighted position and domestic macro indicators offer a margin of safety despite recent weakness.
According to DSP Mutual Fund, concerns around oil, foreign flows and reserves need to be seen alongside five factors: a weak real effective exchange rate, narrower inflation differentials with the US, resilience in the balance of payments, more reasonable large-cap equity valuations and the cyclical nature of foreign exchange reserves and flows.
REER advantage
DSP Mutual Fund said the rupee’s real effective exchange rate stood at 89.7 at the end of April 2026, based on BIS data, and is estimated to have slipped below 88 when USD/INR crossed 96.9 on 20 May 2026. It said this made the currency the most competitive outside the 2013 twin deficit crisis and the 2008 global financial crisis, leaving it fundamentally undervalued on a trade-weighted basis.
Low inflation differentials
The fund said India’s inflation differential with the US is near one of its narrowest levels in modern history. While this spread has historically averaged 3.5-4 per cent, it has now compressed to 1-2 per cent using India’s core CPI and US core PCE. Over the past 12 months, US CPI averaged 2.8 per cent while India’s CPI averaged 2.3 per cent, a 50 basis point gap in India’s favour, which DSP Mutual Fund said points to slower long-term rupee depreciation.
Balance of payments resilience
DSP Mutual Fund said current worries are driven more by expectations of crude staying above $120 a barrel than by realised stress. It said services exports are running above $418 billion annually, with the latest monthly run rate near $447 billion annualised. A services surplus of about $214 billion and inward remittances above $135 billion create a combined buffer of roughly $349 billion, against an FY26 merchandise trade deficit of about $333 billion.
The fund said a sharper deterioration becomes more likely only if oil stays above $120 for over 12 months. Brent is around $106 a barrel after only briefly touching $120 in March. It also noted that high gold prices have cut jewellery volumes by nearly 25%, which may limit bullion-related pressure.
Large-cap valuations
DSP Mutual Fund said muted FPI and FDI flows reflect concerns over headline valuations, but large-caps have quietly de-rated. Several heavyweights are now below long-term average multiples, while some segments are trading below 15 times forward earnings, with valuations in some cases near Covid-era or global financial crisis lows. It said this could place a floor under FPI selling, especially as top-tier Indian companies continue to post return on equity of 18-20 per cent.
FX reserves and cycles
The report said the RBI’s headline foreign exchange reserves have fallen by $29 billion this year, while the outstanding US dollar forward book stands at roughly 13 per cent of reserves. DSP Mutual Fund said this is not unusual, noting comparable levels of 14 per cent in March 2025 and 11 per cent in March 2013, while the RBI also held a net forward purchase position of 11 per cent in March 2022. It added that FPIs have sold a net $34 billion of Indian equities in FY25 and FY26, the first back-to-back years of net selling since records began in FY99.
Summing up, DSP Mutual Fund said the rupee’s depressed REER, tighter inflation differential, external buffers, improved large-cap valuations and cyclical reserve dynamics together suggest current pressure on the currency should be read in context.
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