Betting against the Indian rupee at its current levels is considered a low-probability trade, according to a report by DSP Mutual Fund. The rupee’s Real Effective Exchange Rate (REER) was 89.7 at the end of April 2026 and is forecasted to have dropped below 88 when the USD-INR pair surpassed 96.9 on May 20, 2026, as per Bank for International Settlements (BIS) data. This positions the currency as one of the most competitive, outside of the 2013 twin deficit crisis and the 2008 Global Financial Crisis.
The report highlights that on a trade-weighted basis, the rupee is fundamentally undervalued, providing a strong margin of safety for investors. It also notes that the inflation differential between India and the United States is among the narrowest in recent history. Historically, this gap averaged between 3.5% and 4%, but a comparison of India’s core Consumer Price Index (CPI) with the U.S. core Personal Consumption Expenditures (PCE) indicates that this difference has compressed to the 1% to 2% range.
Over the past year, U.S. CPI averaged 2.8%, while India’s CPI averaged 2.3%, resulting in a 50 basis point advantage for India. A structurally narrower inflation differential is expected to reduce the long-term depreciation rate of the rupee. Concerns regarding the Balance of Payments are primarily driven by expectations that crude oil prices could permanently settle above $120 per barrel, rather than by realized external stress. The report suggests that unless oil prices hold at those elevated levels for over a year, India should be able to avoid the severe distress experienced from 2011 to 2013.
India’s structural buffers are deemed undervalued; services exports exceed $418 billion annually, with current projections nearing $447 billion. The country boasts a services surplus of about $214 billion and inward remittances exceeding $135 billion, translating to a net invisible shield of approximately $349 billion. This figure effectively neutralizes the FY26 merchandise trade deficit of around $333 billion before accounting for primary income outflows.
At a crude oil price of $120, the import bill is estimated to reach roughly $215 to $220 billion, which could push the current account deficit to about 2.5% to 3% of GDP. However, the price of Brent crude is currently around $106 per barrel, having only briefly touched $120. The rupee has already adjusted more than 5% of a potential 10% stress adjustment, and diminishing domestic gold demand—driven by a nearly 25% drop in jewelry volumes—will also help alleviate current account stress linked to bullion.
In terms of valuations, Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI) flows have remained muted due to perceived high aggregate valuations. Nevertheless, the large-cap segment, which accounts for over two-thirds of net FPI purchases, has experienced a quiet de-rating. Many large companies are now trading below their long-term average multiples, with some segments below 15 times forward earnings, reflecting valuations comparable to those seen during the COVID-19 pandemic or the Global Financial Crisis.
This valuation comfort should help stabilize FPI selling, especially as leading Indian businesses continue to deliver return on equity (ROE) of upwards of 18% to 20%. The Reserve Bank of India (RBI) reported that its headline foreign exchange reserves have declined by $29 billion this year, with the outstanding USD forward book at about 13% of total reserves. While this situation warrants monitoring, it is not unprecedented; the forward book was at 14% in March 2025 and 11% in March 2013.
FPIs have been net sellers of Indian equities amounting to $34 billion in FY25 and FY26, marking the first consecutive year of net selling since records began in FY99. DSP Mutual Fund noted, “Currencies, interest rates, and flows are inherently cyclical. Betting against the Rupee at these depressed REER levels and tight inflation differentials is a low-probability trade.”
Published on May 23, 2026.
