Why AI boom is quietly hurting Indian rupee
What's the story
Mahesh Nandurkar, MD and Head of India Research at Jefferies India, has said that the weakening Indian rupee is more a result of declining capital inflows than the current account deficit (CAD). He noted that while India's CAD remains relatively stable, the outflow of foreign money from Indian markets is putting more pressure on the currency.
Market dynamics
Nandurkar highlights capital outflow through Indian equity markets
Nandurkar highlighted a sharp decline in India's capital surplus over the last two years. He said that foreign portfolio investors, promoter stake sales, and private equity exits have led to nearly $80 billion of capital outflows through Indian equity markets. This has cut down on the foreign capital that usually supports the rupee and finances India's growth needs.
Investment shift
Global interest in AI drawing capital away from India
Nandurkar attributed the outflow of foreign money from India to global interest in artificial intelligence (AI). He said that global capital is chasing AI-linked opportunities in the US, South Korea, and Taiwan where earnings growth has been much stronger than in India. Companies in these markets are seeing dollar-denominated earnings growth of 50-60%, driven by demand for semiconductors and memory chips linked to AI infrastructure.
Market comparison
Indian equities trading at significant premium to other emerging markets
Nandurkar also noted that Indian equities are trading at a significant premium to other emerging markets. He said they are trading at around 20 times earnings, compared with 13-14 times for many other Asian markets. This has made it easier for global investors to move their money elsewhere. Despite this, domestic investors continue to buy steadily through systematic investment plans (SIPs), mutual funds, insurance, and provident fund flows.
Currency outlook
Rupee could be undervalued at current levels
Nandurkar also thinks the rupee could be undervalued. He said it is trading nearly 9-10% below historical fair value levels and could recover if tensions in West Asia ease. "If we really end up seeing some kind of an end or some kind of a resolution to the West Asia war, then I think there are reasons to believe that the rupee can actually strengthen from here on," he said.
Future predictions
Jefferies cuts FY27 earnings growth estimate to 13-14%
Nandurkar said that if the strong domestic inflows sustain, we might see some more foreign capital exit as well. He acknowledged that earnings estimates for FY27 have been lowered due to higher oil prices and geopolitical tensions. Jefferies has cut its earnings growth estimate from around 16% earlier to nearly 13-14% now. However, Nandurkar believes the broader economy remains stable with healthy credit growth, auto demand, and consumption trends despite market caution over global risks and foreign flows.