Rupee rout vs US dollar dims hopes of a strong recovery in Indian stocks

The Indian rupee’s slide to repeated record lows against the US dollar is finally starting to pinch the equity outlook, with analysts warning that prolonged weakness could undermine confidence in the nascent recovery of the $5.2 trillion stock market.

The Indian Rupee is Asia's worst performing currency against the US dollar in 2025. (Reuters)

Asia’s worst-performing currency this year is emerging as a near-term threat to a rebound in Indian stocks, despite strong economic growth and a revival in corporate earnings. In December, global funds have withdrawn $1.6 billion from local equities, reversing $1.3 billion of inflows over the prior two months. They have also pulled money from local debt.

With India heavily dependent on overseas capital to fund its current-account gap and corporate expansion, sustained outflows threaten to keep equities under pressure.

“Foreign investors have continued to pare exposure to Indian equities and debt, resulting in steady dollar outflows,” said Akshat Garg, head of research at Choice Wealth. There is “growing pressure on the currency amid a combination of global uncertainty and India-specific capital flow challenges,” he added.

The steepest US tariffs in Asia have weighed on sentiment as traders await the two nations to finalise negotiations for a trade deal. The benchmark NSE Nifty 50 Index retreated about 1.7% from near an all-time high in November, before recovering some losses.

The latest setback caps a year in which Indian shares have lagged most emerging-market peers. Slowing earnings growth, elevated valuations and a lack of compelling artificial intelligence-related themes have already driven a rotation toward North Asian markets.

The currency has fallen more than 1% in December to 90.7337 per dollar on Monday. Strategists at Kotak Securities expect it to reach 91 by the end of the month. The Reserve Bank of India may not strongly resist further weakness in the current environment, prioritizing growth over currency defense, according to Barclays Plc.

That risks prolonging the pain for equities.

A weaker rupee does benefit companies that earn a large share of revenue overseas, particularly technology exporters. A gauge of IT stocks has climbed about 14% since the end of September, coinciding with the period in which rupee losses deepened.

For now, traders are bracing for more volatility as the rupee’s slide compounds concerns over trade, earnings and capital flows. Until the currency stabilises or global conditions turn more supportive, India’s long-awaited equity rebound may continue to struggle for traction.

Equities face muted returns as weaker rupee, range-bound government bond yields, and modest earnings growth “favour selective sectoral exposure”, Dhananjay Sinha, head of research at Systematix Shares and Stocks Ltd. wrote in a note.

A sliding rupee benefits technology, pharmaceutical and metal stocks, but hurts banks, energy producers and infrastructure companies, Sinha wrote.