Betting against the rupee at current levels is a low-probability trade, and the data now favours allocating toward rupee-denominated assets across both equities and bonds, a report by DSP Mutual Fund has suggested.

The rupee's Real Effective Exchange Rate was at 89.7 at the end of April 2026 and is estimated to have slipped below 88 when USD-INR breached 96.9 on May 20, 2026, BIS data shows. Outside of the 2013 twin deficit crisis and the 2008 Global Financial Crisis, this is the most competitive the currency has been.

On a trade-weighted basis, the rupee is fundamentally undervalued, creating a strong margin of safety for investors, the report says.

India's inflation differential with the US is also at one of its narrowest levels in modern history.

Historically, the spread averaged 3.5 per cent to 4 per cent, but comparing India's core CPI with US core PCE (Personal Consumption Expenditures) shows the gap has compressed to the 1 per cent to 2 per cent range.

Similarly, over the last 12 months, US CPI averaged 2.8 per cent while India's CPI averaged 2.3 per cent, a gap favouring India by 50 bps.

A structurally narrower inflation differential implies the long-term depreciation rate of the rupee will decelerate, not quicken, the report said.

Balance of Payments concerns are being driven more by expectations of crude oil permanently resetting above $120 per barrel than by realised external stress.

Unless oil anchors at those elevated levels for more than 12 months, India should avoid the severe distress seen from 2011 to 2013.

The country's structural buffers remain underappreciated. Services exports are running at over $418 billion annually, with the latest run-rate closer to $447 billion annualised. With a services surplus of about $214 billion and inward remittances above $135 billion, India has a net invisible shield of roughly $349 billion.

That alone neutralises the FY26 merchandise trade deficit of about $333 billion, before primary income outflows, the report says.

At $120 crude, the import bill would be roughly $215 to $220 billion, and the current account deficit could move toward 2.5 per cent to 3 per cent of GDP. But Brent is around $106 per barrel and has touched $120 only briefly.

The rupee has already adjusted more than 5per cent of a likely 10per cent stress adjustment. Gold demand destruction, with domestic jewellery volumes down nearly 25per cent, will also contain current account stress from bullion.On valuations, FPI and FDI flows have been muted on perceived high aggregate valuations.

Yet the large-cap segment, which absorbs over two-thirds of net FPI purchases, has quietly de-rated. Several heavyweights are now trading below long-term average multiples, with select segments below 15x forward earnings -- some at COVID or GFC lows.

This valuation comfort should place a floor under FPI selling, especially as top-tier Indian businesses continue to deliver ROE upwards of 18per cent to 20 per cent.

RBI's headline FX reserves have declined by $29 billion this year, with the outstanding USD forward book at roughly 13 per cent of total reserves.

While this warrants observation, it is not an anomaly. The forward book was at 14 per cent in March 2025 and 11 per cent in March 2013. FPIs have been net sellers of Indian equities in FY25 and FY26 to the tune of $34 billion, the first time for two consecutive years since data recording began in FY99.

"Currencies, interest rates, and flows are inherently cyclical," DSP Mutual Fund said. "Betting against the Rupee at these depressed REER levels and tight inflation differentials is a low-probability trade."

Published on May 23, 2026