With India heavily dependent on overseas capital to fund its current-account gap and corporate expansion, sustained outflows threaten to keep equities under pressure.
“Foreign investors have continued to pare exposure to Indian equities and debt, resulting in steady dollar outflows,” said Akshat Garg, head of research at Choice Wealth. There is “growing pressure on the currency amid a combination of global uncertainty and India-specific capital flow challenges,” he added.
The steepest US tariffs in Asia have weighed on sentiment as traders await the two nations to finalise negotiations. The benchmark NSE Nifty 50 Index retreated about 1.7% from near an all-time high in November before recovering some losses.
The latest setback caps a year in which Indian shares have lagged most emerging-market peers. Slowing earnings growth, elevated valuations and a lack of compelling artificial intelligence-related themes have already driven a rotation toward North Asian markets.
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The currency has dropped 1.5% in December and touched a new record low of 90.8250 per dollar on Tuesday (Dec 16). Strategists at Kotak Securities expect it to reach 91 by the end of the month. The Reserve Bank of India may not strongly resist further weakness in the current environment, prioritising growth over currency defence, according to Barclays plc.
That risks prolonging the pain for equities.
A weaker rupee does benefit companies that earn a large share of revenue overseas, particularly technology exporters. A gauge of information-technology stocks has climbed about 14% since the end of September, coinciding with the period in which rupee losses deepened.
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For now, traders are bracing for more volatility as the rupee’s slide compounds concerns over trade, earnings and capital flows. Until the currency stabilises or global conditions turn more supportive, India’s long-awaited equity rebound may continue to struggle for traction.
Equities face muted returns as a weaker rupee, range-bound government bond yields and modest earnings growth “favour selective sectoral exposure”, Dhananjay Sinha, head of research at Systematix Shares and Stocks Ltd, wrote in a note.
A sliding rupee benefits tech, pharmaceutical and metal stocks but hurts banks, energy producers and infrastructure companies, Sinha wrote.
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