India's SIP boom may be weakening rupee by aiding foreign exits: Jefferies
New Delhi, May 24
The recent weakness in the Indian rupee may be driven less by rising oil prices or concerns around the current account deficit and more by relentless domestic equity inflows through systematic investment plans, according to a report by Jefferies.
In a note titled "INR Pressure - The Downside of SIPs," the brokerage said sustained foreign selling in Indian equities, coupled with strong domestic liquidity, has become a major factor weighing on the rupee.
Jefferies estimated that equity market-driven outflows have reached nearly $78 billion over the last two years, as foreign portfolio investors (FPIs), private equity firms and foreign promoters used strong domestic demand to reduce their holdings in what they consider an expensive market.
The brokerage noted that robust domestic inflows through SIPs, mutual funds and retirement-linked investments provided foreign investors with an easy exit route despite heavy selling pressure.
According to the report, FPIs sold a record $21 billion worth of Indian equities in FY26 and have continued to remain net sellers in FY27 so far.
Since April 2024, FPIs alone have offloaded Indian equities worth a net $44 billion, the report stated.
Despite the sharp foreign outflows, benchmark equity indices remained relatively stable as domestic institutional investors and retail participants continued absorbing the selling through steady SIP inflows and rising allocations from EPFO and NPS-linked investments.
However, Jefferies cautioned that this trend has weakened India's capital account position.
The brokerage said India's capital account surplus dropped to around 0.5 per cent of GDP during FY25 and FY26, the lowest level on record, compared with an average surplus of 2.6 per cent over the previous decade.
At the same time, net foreign direct investment remained subdued at nearly $5 billion during the two-year period, partly because of stake sales by promoters and private equity investors.
As a result, India's balance of payments has remained negative over the past two years, and Jefferies expects another weak year ahead.
Still, the brokerage believes the situation could reverse if foreign investor sentiment improves.
It pointed out that in three of the last four instances where the rupee depreciated by more than 10 per cent over a 12-month period, FPI inflows rebounded strongly in the following year.
— IANS
Reader Comments
I've been doing SIP for 5 years and it's been a mixed bag. This analysis makes sense—domestic liquidity is high, but if FPIs are selling because they think the market is expensive, shouldn't we be cautious too? The rupee fall means my returns are actually lower in real terms. Maybe time to pause and reassess. 😕
Jefferies is spot on. But let's also blame the government's over-reliance on FII flows to prop up the rupee. Instead of building a strong export base, we're dependent on hot money. Retail investors shouldn't be blamed—they're just following the herd. Policy needs to incentivize long-term domestic capital formation, not just SIPs.
Interesting perspective. While SIPs have democratized investing, this shows we're not thinking holistically. The rupee weakness affects everyone—imports become costlier, inflation rises. Maybe SEBI should look at curbing excessive FII selling or encouraging more domestic institutional buying. But that's easier said than done 🤷♂️
Jefferies is a foreign brokerage itself, so take it with a pinch of salt. They benefit from rupee volatility. Yes, FIIs are selling, but Indian retail investors are showing tremendous confidence in our economy. SIPs aren't the problem—the problem is we need more domestic manufacturing and exports to strengthen the rupee. Stop blaming retail investors! 🙄
As someone tracking Indian markets from the US, this is a fascinating dynamic. India's domestic liquidity is massive now. But FIIs
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