The Indian rupee may be heading into a period of relative stability, thanks to easing geopolitical tensions and a series of measures by the Reserve Bank of India (RBI) and the government to attract foreign money into the country. But economists warn that the relief may only be temporary, with higher US interest rates and slowing global investment flows posing fresh risks in the coming years.
According to a report by Elara Capital, FY27 could be a “tale of two halves” for the rupee. In the near term, the currency is expected to remain stable and even strengthen modestly as India’s external position improves. However, pressure could return in the second half of the fiscal year if the US Federal Reserve resumes raising interest rates.
Why is the rupee looking stronger now?
Over the past few months, several developments have helped reduce pressure on the rupee.
First, tensions in the Middle East have eased, reducing fears of a prolonged oil-price shock. Since India imports most of its crude oil, higher oil prices typically hurt the rupee by widening the country’s trade deficit.
Second, the RBI and the government have introduced measures aimed at attracting foreign capital into India’s debt market.
The biggest change came on June 5, when the government made investments in certain Indian government bonds tax-free for foreign portfolio investors (FPIs). Since then, foreign investors have poured about $1.7 billion into Indian government securities through the Fully Accessible Route (FAR), compared with just $229 million in the 10 trading sessions before the announcement.
“The policy measures in the past three months followed a three-track policy architecture: (i) FX market stabilization (NOP cap, NDF ban, gold duty hike, forex swaps), (ii) tax relaxation for government bonds (FAR expansion, removal of withholding and capital gains tax), and (iii) debt FX inflows (FCNR(B) and PSU ECB hedging cost subsidy. The landmark Income-tax Ordinance of 5 June 2026, which made India’s G-Sec investment tax-free for FPIs, has led to resumption of reasonable flows into Indian debt market apart from moderation in the yields,” said the report.
The report estimates that India could attract $80-85 billion in bond-related inflows if the country is included in the Bloomberg Global Bond Index and current policy measures continue to support foreign participation.
What does this mean for ordinary Indians?
A stable rupee generally has several benefits:
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Imported goods become less expensive. -
Fuel price pressures ease. -
Inflation remains under control. -
Overseas education and foreign travel become relatively cheaper. -
Businesses importing raw materials face lower costs.
For investors, a stable currency also improves confidence in Indian assets and can support foreign investment.
Why are experts still worried?
The biggest concern is the United States.
The report expects the US Federal Reserve to raise interest rates by a cumulative 75 basis points between September 2026 and January 2027 as it focuses on bringing inflation back to its 2% target.
Higher US interest rates often make American assets more attractive to global investors.
When investors can earn higher returns in US bonds, they tend to move money out of emerging markets such as India and into the US. This strengthens the dollar and puts pressure on currencies like the rupee.
The report expects the US Dollar Index (DXY), which measures the dollar against major global currencies, to move toward 105, limiting the rupee’s gains even if India’s domestic fundamentals remain relatively strong.
Why does this matter for stock market investors?
The report highlights a worrying trend in global capital flows.
Investors are increasingly directing money toward US technology companies and artificial intelligence-related investments.
According to EPFR data cited in the report, nearly $120 billion flowed into US equities in a single week, driven largely by exchange-traded funds (ETFs).
At the same time, investors have been pulling money out of India-focused funds. Around $8.5 billion has reportedly been withdrawn from such funds in 2026 alone as investors shift capital toward AI-linked opportunities in the US, Taiwan and South Korea.
This means that even if India’s economy continues to grow strongly, foreign portfolio investment (FPI) inflows into Indian equities could remain subdued.
“As US braces for rate hike cycle under Kevin Warsh, amid continued concentration of AI related flows into the US, the outlook for FPI inflows into Indian equities remains somber. EPFR data for the week ending 19 June 2026, shows that unprecedented inflows of $ 120 billion have gone into US equities this week led by ETFs. Capital is rotating back to the US with the Dollar index surging to one-year high and euphoria in global AI trade narrowing to play the US tech innovators. For now, India remains a funding source for this global rotation. Redemptions from India-focused funds have accelerated since the start of the year as investors redirected capital toward AI-linked opportunities in Taiwan and South Korea,” noted the report.
The bigger challenge: Global investment flows are shrinking
While recent policy measures may help attract debt investments, economists believe India’s longer-term challenge is attracting durable foreign direct investment (FDI).
Global FDI flows have been declining for years.
According to the report:
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Global FDI peaked at $2.21 trillion in 2015. -
It has since fallen to around $1.5 trillion. -
FDI into developing Asia declined 3% in 2024. -
Infrastructure project financing globally fell 14% in 2024. -
The US remained the world’s largest FDI destination, attracting $279 billion in 2024.
The nature of investment is also changing.
Instead of broad-based infrastructure and manufacturing investments, capital is increasingly flowing into technology sectors such as semiconductors and artificial intelligence.
This means countries like India are competing for a smaller pool of global investment dollars.
What should investors watch?
For now, the outlook for the rupee appears better than it did a few months ago.
Government bond inflows are improving, current-account concerns have eased and geopolitical risks have moderated.
However, investors should keep a close eye on three factors:
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US Federal Reserve policy decisions. -
Foreign investor flows into Indian stocks and bonds. -
Trends in global foreign direct investment.
Key takeaways
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RBI and government measures have boosted foreign debt inflows. -
India could attract $80-85 billion in bond-related flows. -
The rupee may stay stable in the near term. -
US Fed rate hikes could strengthen the dollar later in FY27. -
Foreign money is increasingly flowing into US AI and tech stocks. -
Global FDI flows have fallen from $2.21 trillion in 2015 to about $1.5 trillion today. -
Long-term foreign capital remains India’s biggest challenge.
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