India's SIP boom may be weakening the rupee by enabling FPI exits: Jefferies
Synopsis
Jefferies has flipped the conventional rupee-weakness narrative on its head: it is not oil or the current account deficit doing the most damage — it is India's own SIP culture. By providing a steady domestic bid, retail investors have handed foreign institutions a near-frictionless exit worth $78 billion over two years, quietly draining the capital account to a record low of 0.5% of GDP.
Key Takeaways
Jefferies argues that SIP-driven domestic inflows have enabled $78 billion in equity market-driven outflows over the last two years .
FPIs sold a record $21 billion in Indian equities in FY26 and remain net sellers in FY27 .
Since April 2024 , FPIs have net-sold Indian equities worth $44 billion .
India's capital account surplus fell to 0.5% of GDP in FY25–FY26 — the lowest on record versus a decade-average of 2.6% .
Net FDI remained subdued at around $5 billion over the two-year period.
Jefferies notes that in 3 of the last 4 instances of 10%+ rupee depreciation, FPI inflows rebounded strongly the following year.
The recent weakness in the Indian rupee may be less a function of elevated oil prices or current account deficit concerns, and more a consequence of relentless domestic equity inflows through Systematic Investment Plans (SIPs), according to a note by global brokerage Jefferies released on 24 May. The report, titled 'INR Pressure – The Downside of SIPs,' argues that strong domestic liquidity has inadvertently handed foreign investors a smooth exit ramp from Indian equities.
The Core Argument
Jefferies estimated that equity market-driven outflows have totalled nearly $78 billion over the last two years, as foreign portfolio investors (FPIs), private equity firms, and foreign promoters capitalised on buoyant domestic demand to trim holdings in what they view as an expensive market. Robust inflows via SIPs, mutual funds, and retirement-linked vehicles — including EPFO and NPS-linked investments — absorbed the selling, keeping benchmark indices broadly stable even as foreign money flowed out.
This dynamic, Jefferies cautioned, has quietly undermined India's capital account position rather than its equity markets.
Scale of Foreign Selling
According to the report, FPIs sold a record $21 billion worth of Indian equities in FY26 and have remained net sellers in FY27 so far. Since April 2024, FPIs alone have offloaded Indian equities worth a net $44 billion. Net foreign direct investment also stayed subdued at approximately $5 billion over the two-year period, partly due to stake sales by promoters and private equity investors.
Capital Account Under Strain
India's capital account surplus dropped to around 0.5% of GDP during FY25 and FY26 — the lowest level on record — compared with an average surplus of 2.6% over the preceding decade, the brokerage noted. As a direct consequence, India's balance of payments has remained negative over the past two years, and Jefferies expects another weak year ahead.
This comes amid a broader debate about whether India's domestic investment culture, while a structural positive for market stability, carries unintended macro costs when it consistently facilitates large-scale foreign exits without equivalent capital inflows.
A Potential Reversal
Jefferies did not paint an entirely bleak picture. The brokerage pointed out that in three of the last four instances where the rupee depreciated by more than 10% over a 12-month period, FPI inflows rebounded strongly in the following year. The firm believes the situation could reverse if foreign investor sentiment towards India improves, potentially restoring capital account health and easing pressure on the rupee.
Whether that sentiment shift materialises will depend on global risk appetite, domestic earnings trajectories, and the relative attractiveness of Indian valuations — all of which remain in flux.
Point of View
Liquid domestic bid, SIPs have reduced the friction for foreign exits, effectively subsidising FPI and PE divestment at scale. The capital account deterioration to a record-low 0.5% of GDP is not a cyclical blip; it reflects two years of persistent outflows that domestic flows absorbed in equities but could not offset in the balance of payments. The policy question no one is asking loudly enough is whether SEBI, RBI, and the Finance Ministry need a coordinated framework to manage the macro externalities of a domestically strong but foreign-exit-prone equity market.
NationPress
1 Aug 2026
Frequently Asked Questions
Why does Jefferies say SIPs are weakening the Indian rupee?
Jefferies argues that robust SIP and mutual fund inflows have provided foreign investors — FPIs, PE firms, and foreign promoters — with a reliable domestic buyer, enabling them to exit Indian equities at scale without crashing markets. This has driven nearly $78 billion in equity-related outflows over two years, pressuring the rupee through the capital account rather than the trade account.
How much have FPIs sold in Indian equities recently?
FPIs sold a record $21 billion in Indian equities in FY26 and have remained net sellers in FY27. Since April 2024, cumulative net FPI selling in Indian equities has reached $44 billion, according to the Jefferies report.
What has happened to India's capital account?
India's capital account surplus dropped to approximately 0.5% of GDP in FY25 and FY26 — the lowest level on record — compared with a decade-average surplus of 2.6%. The balance of payments has remained negative for two consecutive years, and Jefferies expects the weakness to persist in the year ahead.
Is there a chance the rupee and capital flows recover?
Jefferies believes a recovery is possible if foreign investor sentiment improves. It notes that in three of the last four instances where the rupee fell more than 10% over 12 months, FPI inflows bounced back strongly in the subsequent year, which could help restore capital account health.
Why did benchmark indices stay stable despite heavy FPI selling?
Domestic institutional investors and retail participants — channelling money through SIPs, mutual funds, EPFO, and NPS-linked investments — consistently absorbed FPI selling, keeping benchmark indices relatively stable even as large volumes of foreign capital exited the market.
