Rupee’s undervaluation to lure global funds, say analysts

Global fund flows into local shares often rebound when the rupee depreciates more than its long-term average, Yes analysts said

India’s rupee is undervalued at current levels after sliding to record lows, and this could draw foreign investors back to the nation’s equities, according to Elara Capital and Yes Securities Ltd.

Elara analysts led by Garima Kapoor said the nation’s 40-currency real effective exchange rate, or REER, was 97.47 in October — just under one standard deviation below its historical average — and added that equity inflows typically pick up pace one to two quarters after this gauge bottoms out. A value below 100 means the currency is undervalued relative to its peers.

The rupee hit a fresh record low in early trading Thursday, extending its break below the closely watched 90-per-dollar level, as uncertainty over a crucial US trade deal continued to erode sentiment. Still, analysts say the currency’s sharp undervaluation historically tends to attract foreign investors back into local assets, suggesting further downside may be limited.

“The rupee is undervalued on a real effective exchange rate basis, which provides comfort to foreign institutional investors who remain sensitive to currency volatility,” Yes Securities analysts including Hitesh Jain wrote in a note.

Global fund flows into local shares often rebound when the rupee depreciates more than its long-term average, Yes analysts said. The currency’s 5.2% drop versus the dollar this year is already sharper than the 25-year annual average of 3% and exceeds the 3%-3.5% band recently cited by Reserve Bank of India Governor Sanjay Malhotra.

Foreigners have bought about $752 million of equities in the current quarter, signaling a tentative return even as total outflows for 2025 exceed $16 billion. Local shares have trailed regional peers this year by the widest margin in decades, pressured by the region’s harshest US tariffs and stretched equity valuations.

The RBI has intermittently stepped in to support the rupee by supplying dollars after doggedly defending the September low for about two months. The currency has weakened sharply in recent sessions despite this intervention as the trade deal with Washington remains elusive.