As the Indian rupee slides toward the psychologically crucial 100-per-dollar mark, foreign portfolio investors (FPIs) are starting to question not just the currency’s trajectory but also the Reserve Bank of India’s silence on how far it is willing to let the currency fall.
Adding to the pressure, the appeal of Indian assets is fading as the gap between domestic yields and those in developed markets narrows, stripping away the high-return advantage that once drew global capital, experts told Mint.
At meetings held alongside Macquarie’s Asia Conference in Hong Kong last week, several FPIs said the rupee’s persistent depreciation was making them reluctant to increase exposure to Indian assets, Suresh Ganapathy, managing director and head financials research in India for Macquarie, wrote in an email to investors on 25 May.
“Many vociferously said unless INR stabilises they aren’t touching India and government’s or RBI’s initiatives on stabilising the INR have not been satisfactory,” Ganapathy wrote in an email.
“The biggest near-term issue for them is INR depreciation, which needs to be arrested. FIIs were surprised that the government and regulators haven't taken much action to stabilise the INR,” said a report titled ‘Macquarie Asia Conference 2026’.
The rupee has declined by more than 5% against the dollar since the Iran war began on 28 February, according to Bloomberg data. It was also one of the world’s poorest-performing currencies in FY26, falling about 11% against the dollar.
After hitting consecutive record lows last week, the rupee appreciated by nearly 50 paise to end at 95.24 per US dollar on Monday from 95.71 on Friday. RBI governor Sanjay Malhotra told Mint in an interview that the rupee is undervalued after its recent depreciation.
Outflows of foreign capital have exacerbated the rupee’s fall. According to data from NSDL, FPIs pulled out nearly ₹1.8 trillion from Indian equities in FY26, the highest outflow in 34 years. As of 22 May, they have sold equities worth ₹2.2 trillion so far this year.
Foreign investors have continued to pare holdings in Indian financial companies, with foreign institutional investor (FII) ownership in lenders such as HDFC Bank, ICICI Bank and Kotak Mahindra Bank falling sharply over the past two years, the report said.
Deeper than currency weakness
However, the issue runs deeper than just currency weakness. “I think it is a misnomer that FPIs are unhappy with the management of the rupee… The problem we have today is that return differentials have shrunk, so the advantage that they used to get in investing in India no longer exists because returns in other countries have gone up,” said Ajay Marwaha, senior executive and fixed income head for local and offshore at Nuvama Group.
The rate difference between a 10-year benchmark Indian government bond yield and its US counterpart has shrunk to 253 basis points, as against the ideal of 350 bps. India’s relative attractiveness has diminished as bond yields across developed markets such as Japan, European Union, US and the UK have risen sharply.
Uncertainty over the RBI’s currency management has compounded investor nervousness, Marwaha said, adding that investors are seeking greater policy communication. “FPIs always look for guidance and we have a silent RBI which is refusing to guide on the currency,” he said.
Marwaha added that the absence of clear messaging is increasingly being interpreted by global investors as policy uncertainty. “At the moment, there is an absence of any guidance on the rupee, and FPIs believe absence of guidance is equal to absence of management and absence of management then becomes potentially absence of ability to manage.”
So far, the RBI has intervened in the spot market to curb volatility, conducted buy-sell swaps, and capped banks' net open position (NOP) in the non-deliverable forwards market to $100 million at the end of each day to curb speculative activity.
The pull of AI
Market participants said the uncertainty around the rupee’s trajectory also coincides with a broader shift in global capital allocation away from emerging markets toward developed economies and artificial intelligence opportunities.
Foreign investors are increasingly adopting a wait-and-watch approach as currency volatility and global commodity shocks cloud visibility on returns, said Khushboo Chopra, head of business development India at IQ-EQ.
“There is concrete evidence in secondary equity markets where FPI ownership has hit a multi-year low of roughly 15.8%, clearly demonstrating that foreign investors are actively reducing local exposure,” Chopra said. “New mandates or expanded allocations to Indian debt and equities are being delayed until the rupee stabilises and global commodity shocks cool down,” she added.
She said rising yields in developed markets and stronger returns from AI and semiconductor investments in economies such as the US, Taiwan and South Korea were also diverting flows away from India.
RBI’s credibility trap
Former RBI governor Duvvuri Subbarao recently highlighted the importance of policy communication and credibility in maintaining investor confidence amid currency volatility.
“The danger is not merely depletion of reserves; it is the credibility trap. If RBI is seen to be intervening heavily and is yet unable to arrest the rupee’s fall, markets may conclude that the central bank is losing the battle,” Subbarao wrote in an article for Hindustan Times on 19 May.
As on 15 May, the central bank’s foreign exchange reserves have fallen to $688 billion, compared to $723 billion before the West Asia war began, RBI data showed.
“Confidence can then evaporate abruptly, setting off a free fall in the exchange rate. When it comes to battling an exchange rate crisis, a failed defence is worse than no defence,” Subbarao said.
Once markets sense that the central bank’s resolve or firepower is inadequate, speculative pressures can intensify dramatically and destabilise broader financial markets as well, he added.
Marwaha said he believes the return differential challenge will continue to weigh on flows unless India either offers higher yields or global yields soften materially.