The Indian rupee has slipped to a fresh record low, crossing 91 against the US dollar, adding to pressure across financial markets. What began as a currency and bond market issue is now weighing on equity sentiment, as both foreign and domestic investors reassess risk amid currency weakness and tightening liquidity.
The rupee is down about 6.6% year-to-date, and brokerages note that the pressure is no longer purely cyclical. According to Systematix Institutional Equities, the move reflects a longer-term trend of managed depreciation, with structural factors now playing a larger role.
Why the rupee weakness matters for equities
A weaker currency affects equities through multiple channels:
- Foreign investors face currency translation risk, reducing net returns.
- Domestic liquidity tightens as RBI interventions and external pressures absorb rupee liquidity.
- Input costs rise for import-heavy sectors, impacting margins.
- Valuation comfort weakens when currency-adjusted returns fall.
As a result, analysts expect muted equity returns in the near term, especially in high-beta segments.
Sector impact: Who benefits, who faces pressure
Potential beneficiaries of rupee depreciation
- Information Technology
- Pharmaceuticals
- Metals
- Export-oriented auto companies
These sectors benefit from dollar-linked revenues or export competitiveness.
Sectors under pressure
- Banks and financials
- Oil & gas and energy
- Infrastructure and PSU-linked businesses
These sectors face higher funding costs, import exposure, or sensitivity to domestic liquidity conditions.
External account and capital flow concerns
Brokerages highlight a strong correlation between a widening current account deficit (CAD) and rupee depreciation. While India’s CAD as a percentage of GDP has narrowed over the decade, capital inflows have weakened sharply.
- Total capital flows have fallen from 8.8% of GDP in FY08 to ~0.4% in FY25
- Net FDI has declined to near-zero levels as a share of GDP
This suggests that currency stability is increasingly dependent on portfolio flows and RBI intervention, rather than durable external strength.
Equity strategy: What investors should consider
Given the current environment, analysts recommend:
- Higher allocation to defensive sectors such as IT, pharma and select private banks
- Caution on small- and mid-cap stocks, given higher volatility and stretched valuations
- Selective positioning rather than broad market exposure
Emkay Global notes that markets may remain vulnerable to periodic sell-offs until clarity emerges on external trade risks, particularly around India–US tariff negotiations.
Medium-term view
Despite near-term volatility, brokerages remain constructive on India’s long-term growth story, citing improving domestic demand and an early recovery in earnings momentum. However, elevated valuations and currency weakness suggest that returns may be more gradual and selective, rather than broad-based.
Our view
For clients, the current phase underscores the importance of:
- Currency-aware portfolio construction
- Sector diversification with export-linked earnings
- Avoiding overexposure to high-beta or leveraged segments
Rupee depreciation does not signal a systemic crisis, but it does warrant more cautious return expectations and disciplined asset allocation in the near term.