Rupee undervaluation could draw foreign investors back to Indian stock markets, say two brokerages: Here's why

Indian rupee has been hitting fresh record lows over the past few sessions, crossing the key Rs 90-mark against the US dollar yesterday. Two brokerages, however, suggested that this undervaluation in the Indian currency could draw foreign investors back to Indian stock markets.

The rupee opened at 90.41 against the dollar on December 4, before paring some losses. Rupee stood at 90.11 against the American greenback, as seen at 12.50 pm. Analysts expect the underperformance of rupee to continue in the near term.

Will rupee continue to fall in near-term?

In the near term, the rupee is likely to remain under pressure and trade in the 89.50–91.20 range, especially if crude oil prices stay elevated and foreign investors remain risk-averse, said Rahul Gupta, CBO of Ashika Group. "A meaningful recovery will depend on a revival in foreign inflows, clarity on global rate-cut cycles, and improvement in India’s export momentum. Until then, the currency is expected to stay weak but orderly, guided by selective RBI intervention,” the analyst added.

The way the rupee broke past the 90-mark yesterday signals that the pressure hasn’t eased, said Amit Pabari, managing director at CR Forex Advisors. "In fact, the move suggests that pressure will remain, with the pair potentially drifting toward the 90.70–91 zone in the near term," he added.

Will weaker rupee drive foreign inflows?

India has seen persistent foreign outflows this year, driven by several factors. Foreign investors' net selling of its stocks in India amount to nearly $17 billion so far this year, according to Reuters.

Analysts at Elara Capital said that rupee is currently the most undervalued since October 2018 on 40 country trade weighted REER basis. Based on their analysis, equity flows will likely pick up pace with a lag of one-two quarters after the Real Effective Exchange Rate (REER) bottoms.

"As on Oct-25, the REER is less than 1sd below historical mean at 97.47. Additionally, with rate cuts by the RBI positively affecting with lags, potential consumption support, and continued uptick in credit growth, we expect nominal growth to pick up through mid-CY26 along with an uptick in earnings growth– a key factor for the return of foreign capital flows," the domestic brokerage said.

Yes Securities, in its note, also noted that the rupee is undervalued on a REER basis, which provided comfort to foreign institutional investors who remain sensitive to currency volatility. “FIIs inflows in Indian Equities tend to pick  up when depreciation in INR exceeds the long-term average. INR’s  depreciation this calendar year is 4.5%, steeper than the 25-year annual  average of 3%,” it said.

Indian benchmark indices Sensex and Nifty were trading nearly flat, as seen at 1 pm. Sensex rose over 65 points (0.08 percent) to 85,156.61, while Nifty 50 gained around 19 points (0.07 percent) to 26,004.80.

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