Whalesbook
SIPs Fuel Rupee Slide, Not CAD, Says Jefferies
Jefferies has identified strong domestic flows, particularly through Systematic Investment Plans (SIPs), as the main culprit for the Indian rupee's recent sharp depreciation, rather than the current account deficit (CAD). The brokerage firm argues that these robust inflows have provided a convenient exit route for foreign investors seeking to cash out of what they perceive as an overvalued Indian market.
Outflow Drivers Identified
According to a note authored by Mahesh Nandurkar, Abhinav Sinha, and Priyank Shah at Jefferies, equity market-driven outflows have accounted for approximately $78 billion over the last two years. This has coincided with record monthly inflows into equity schemes, which reached ₹38,503 crore in March 2026 and ₹38,410 crore in April 2026, according to data from the Association of Mutual Funds in India (Amfi).
The Indian rupee has depreciated around 7% against the US dollar year-to-date in 2026, trading above the 96 mark, making it one of the worst-performing emerging market currencies. Jefferies' analysis of four previous episodes of sharp INR depreciation (over 10% in 12 months) indicates a potential for foreign portfolio investor (FPI) flows to rebound significantly in the subsequent 12 months in three of those instances.
FPI Selling and Capital Flows
Foreign portfolio investors have divested an estimated $44 billion in Indian equities since April 2024, according to Jefferies. This has compressed the capital account surplus to around 0.5% during FY25-26, a notable decrease from the 2.6% surplus seen in the preceding decade. Despite heavy foreign selling, strong domestic inflows from mutual funds, driven by SIPs and tax advantages, alongside increased equity allocations by the Employees' Provident Fund Organisation (EPFO) and the National Pension System (NPS), have absorbed much of the selling pressure. This has led to a negative balance of payments over the past two years, with another such year anticipated.
CAD Remains Contained
Conversely, Jefferies estimates India's current account deficit (CAD) averaged a record low of just 0.8% of GDP over the past three fiscal years (FY24–FY26). The firm expects the CAD for FY27 to remain well below the 2% of GDP threshold, a level considered manageable. This projection factors in an average crude oil price of $90 per barrel from June onwards and a projected 10% reduction in gold imports.