Rupee beyond 96? DSP MF says that may make Indian assets more attractive

DSP's Message Amid Rupee Panic: This May Be the Time to Buy, Not Run

As the Indian rupee weakens toward record lows and global uncertainty rattles markets, many investors are asking the same question: Should you move money into dollars and gold? Or is this actually the time to invest in India?

 

A new note by DSP Mutual Fund argues the opposite: this may actually be the time to buy rupee-denominated assets like Indian equities and bonds rather than betting against India.

 

At first glance, that sounds counterintuitive. After all, a weaker rupee is usually seen as bad news. But DSP’s argument is that today’s India is very different from the India that faced severe currency stress during the 2008 global financial crisis or the 2013 “taper tantrum.”  The rupee may actually be undervalued right now

 

 

The report’s first argument is that the rupee may already be fundamentally undervalued. It uses a metric called the Real Effective Exchange Rate (REER), which essentially measures whether a currency is expensive or cheap relative to other currencies after adjusting for inflation and trade competitiveness. According to the report, India’s REER slipped below 88 after the rupee weakened past 96.9 to the dollar — levels seen mainly during major crises like 2008 and 2013.

 

"The Rupee's REER at the end of April 2026 was at 89.7 as per BIS data. It is estimated to have slipped below 88 when USDINR breached 96.9 on 20th May’26. To put this in perspective, this is the most competitive the currency has been outside of two major structural crises: the 2013 twin deficit crisis (driven by crude oil sustaining above $100 for three consecutive years) and the 2008 Global Financial Crisis. On a trade-weighted basis, the currency is fundamentally undervalued, creating a strong margin of safety," said the report.

 

In simple terms, DSP is saying the rupee may already have weakened more than India’s actual economic fundamentals justify.

 

Decades-Low Inflation Differentials

 

The second major reason is inflation. Historically, the rupee tended to weaken steadily because inflation in India was much higher than inflation in the United States. If prices in India rise much faster than in America, the rupee naturally loses purchasing power over time.

 

But the report says that gap has narrowed sharply. Over the last year, US inflation averaged 2.8%, while India’s inflation averaged 2.3%. For decades, the inflation gap between India and the US used to be around 3.5% to 4%.

 

Why is this important? Because a smaller inflation gap means the rupee may not depreciate as aggressively over the long term as many investors assume. The old belief that “the rupee only keeps falling forever” may no longer be structurally true in the same way.

 

"Over the last 12 months, US CPI has averaged 2.8% while India's CPI has averaged 2.3%, a gap favouring India by 50bps. Mathematically, a structurally narrower inflation differential implies the long-term depreciation rate of the Rupee against the US Dollar will decelerate, not quicken," added DSP Mutual Fund.  If inflation in India is not rising much faster than the US anymore, then: the rupee may not depreciate as aggressively over the long term.

 

Balance of Payments (BOP) Resilience: India now has a giant invisible dollar shield

 

The biggest fear for India, however, remains oil. India imports most of its crude oil requirements, so whenever oil prices surge, concerns immediately rise about the current account deficit, the rupee and inflation. This was one of the biggest reasons behind the 2013 currency crisis.

 

DSP argues that India now has much stronger “invisible” dollar inflows to offset that risk. India’s services exports — including IT services, consulting, outsourcing and global capability centres — now exceed $418 billion annually, while remittances sent home by Indians abroad are above $135 billion.

 

Together, those two streams create what the report calls a “net invisible shield” of roughly $349 billion. In practical terms, this means India now earns a huge amount of dollars every year even outside merchandise exports. So while high oil prices still hurt, the economy is not as vulnerable as it was a decade ago.

 

The report does acknowledge one major danger: if crude oil remains above $120 per barrel for more than a year, India’s current account deficit could worsen significantly. But DSP says that remains a stress scenario rather than the base case, especially since Brent crude is currently around $106.

 

"Brent is around $106 per barrel. Brent has touched the $120 zone only briefly during the March panic, it has not stayed there. For this scenario, the Rupee has already adjusted more than

5% out of a likely 10% stress adjustment," it said.

 

Moreover, Gold has historically been a massive detractor for the Rupee. However, record-high prices have triggered severe demand destruction, with domestic jewellery volumes contracting by nearly 25%. "Coupled with shifting tax and duty structures on precious metal imports, the overall stress on the current account from bullion is likely to be

significantly contained in the coming quarters," it said.

 

Large-cap Indian stocks may no longer be overpriced 

Another interesting argument in the report is about Indian equities. Foreign investors have been selling Indian stocks heavily over the last two years because valuations were seen as too expensive. In fact, foreign portfolio investors have sold roughly $34 billion worth of Indian equities across FY25 and FY26 combined — the first time since FY99 that they have been net sellers for two consecutive years.

 

However, DSP says large-cap Indian stocks have quietly become much cheaper beneath the surface. Several large companies are now trading below long-term average valuation levels, with some segments falling below 15 times forward earnings.

 

The report argues that while foreign investors have focused on expensive headline indices, many fundamentally strong Indian companies are now available at far more reasonable valuations.

 

DSP also points out that India still has several businesses generating return on equity levels of 18–20%, something relatively rare across emerging markets.

 

DSP’s view is that much of the fear around the rupee, oil prices and foreign outflows may already be reflected in asset prices.  Foreign investors are selling — but that may not last forever

 

People are panicking too much about India’s falling forex reserves and foreign investors selling stocks. These things happen in cycles, and the current situation may not be as dangerous as it looks.

 

Here’s what it actually means in simple language.

 

India has something called:

 

FX reserves (foreign exchange reserves).

 

These are the country’s dollar savings — held mainly by the Reserve Bank of India.

 

The RBI uses these reserves to:

 

protect the rupee,

pay for imports,

manage crises,

and calm markets when the currency becomes volatile.

 

Now the report says:

 

India’s FX reserves have fallen by:

$29 billion this year.

 

This sounds scary at first.

 

People start thinking:

 

“Is India running out of dollars?”

“Will the rupee crash?”

“Is this another 2013-style crisis?”

 

But DSP says:

 

not necessarily.

 

Why?

 

Because central banks constantly use reserves during volatile periods.

 

Imagine this example:

 

Suppose:

 

lots of foreign investors suddenly sell Indian stocks,

they convert rupees into dollars,

and take money out of India.

 

This creates huge demand for dollars.

The rupee then weakens sharply.

 

To prevent panic, the RBI may:

 

sell some of its dollar reserves,

and buy rupees from the market.

 

This reduces volatility.

 

So falling reserves are not automatically a sign of crisis.

Sometimes they simply mean:

 

the RBI is actively managing the currency cycle.

 

Now comes the slightly technical part:

 

the “USD forward book.”

 

What is that?

 

Think of it like:

 

future dollar contracts.

 

The RBI sometimes promises to:

 

buy or sell dollars in the future,

instead of immediately.

 

This is called:

 

intervention through forwards.

 

The report says:

 

the RBI’s forward book is around:

13% of reserves.

 

Some investors worry this reduces “usable” reserves because part of the reserves are already committed in future contracts.

 

But DSP says this is not unusual.

 

Why?

 

Because:

 

the forward book was:

14% in March 2025,

and 11% in March 2013.

 

Meaning:

 

the RBI has always used this tool across different market cycles.

 

Sometimes the RBI:

 

buys future dollars,

sometimes:

sells future dollars,

depending on market conditions.

 

So DSP’s point is:

 

don’t look at reserve decline in isolation and panic.

 

Now comes the second important part:

 

foreign investors (FPIs) have sold:

$34 billion worth of Indian equities across FY25 and FY26.

 

That is huge.

 

And it’s the first time since FY99 that FPIs have been net sellers for:

 

two consecutive years.

 

Again, this sounds negative.

 

But DSP says:

markets and currencies move in cycles.

 

Example:

 

In some years:

 

foreign investors pour money into India,

the rupee strengthens,

stocks become expensive.

 

Then later:

 

investors pull money out,

the rupee weakens,

stock valuations fall.

 

After that:

 

valuations become attractive again,

and foreign money eventually starts returning.

 

DSP believes India may now be closer to:

 

the pessimism phase of the cycle,

rather than the euphoric phase.

 

That’s why the report says:

 

“betting against the rupee” now may be a:

“low probability trade.”

 

Meaning:

the rupee may already be so beaten down that expecting endless collapse from here may not make sense.

 

Instead, DSP argues this could actually be the stage where:

 

Indian stocks,

bonds,

and rupee assets

start becoming attractive again because:

valuations are lower,

sentiment is weak,

and much of the bad news may already be priced in.

 

That does not mean there are no risks. Geopolitical tensions, oil prices, global interest rates and foreign investor behaviour can still create volatility. But the report argues that India today has stronger structural buffers than in previous crises — particularly through services exports, remittances, relatively stable inflation and more reasonable equity valuations.

 

"Currencies, interest rates, and flows are inherently cyclical. Betting against the Rupee at these depressed REER levels and tight inflation differentials is a low-probability

trade. Conversely, the data suggests it is time to allocate toward Rupee-denominated assets across both equities and bonds, said the report.