The Indian Rupee has come under pressure amid elevated crude oil prices, foreign investor selling, and concerns around India’s external balances. However, a recent DSP Mutual Fund note argues that current weakness may not necessarily be a sign of long-term structural stress and could instead create an opportunity for investors looking at Rupee-denominated assets.

The report highlights multiple macro indicators suggesting that despite short-term challenges, conditions may be turning favorable for the Rupee and domestic asset classes such as equities and bonds.

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Is Rupee undervalued?

One of the strongest arguments made in the report revolves around the Rupee’s Real Effective Exchange Rate (REER), which measures currency valuation relative to trading partners. According to BIS data cited by DSP, the Rupee’s REER stood at 89.7 at the end of April and likely slipped below 88 after USD/INR crossed 96.9 in May.

The report says such levels have historically been seen mainly during major stress periods including the 2008 Global Financial Crisis and the 2013 twin-deficit crisis. On a trade-weighted basis, the Rupee now appears fundamentally undervalued, potentially creating a margin of safety.

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Inflation gap

Another factor supporting the Rupee outlook is India’s changing inflation profile. Historically, India’s inflation differential with the United States remained around 3.5–4%. That gap has now narrowed sharply to around 1–2%.

According to the report, US inflation averaged 2.8% over the last year while India’s inflation averaged 2.3%. Narrower inflation gaps typically imply lower long-term currency depreciation pressure.

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Strong buffers

Concerns over India’s Balance of Payments (BoP) continue to rise, especially amid fears of crude oil moving above $120 per barrel. But DSP believes the market may be overestimating the risk.

India’s services exports currently exceed $418 billion annually, while services surplus stands at around $214 billion. Inward remittances are above $135 billion. Together, these components create a substantial cushion for India’s external account.

The report notes that sustained oil prices above $120 for a prolonged period remain a stress scenario rather than the base case.

Large-cap stocks

Foreign portfolio and direct investment flows have remained subdued due to concerns over Indian market valuations. However, DSP notes that large-cap stocks have quietly de-rated beneath the headline indices.

Several large-cap segments are now trading below long-term averages, with select stocks available below 15 times forward earnings. The report suggests this could help limit further foreign selling pressure.

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Currency cycles and reserves matter

The RBI’s foreign exchange reserves have declined by around $29 billion this year, raising concerns over reserve adequacy. Yet the report argues reserve movements and forward positions are cyclical and not unusual.

DSP concludes that betting aggressively against the Rupee at current valuation levels could be a low-probability trade. Instead, it suggests investors may consider opportunities emerging across Rupee-denominated equities and bonds.

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Published on: May 22, 2026 12:51 PM IST