Hey all,
Some of you have been following the rupee story closely on the Why the Rupee Is Falling thread. Record lows near ā¹95, oil, FPI outflows, the usual suspects. But Jefferies dropped a note last week that adds a piece nobody was really talking about, and I think itās worth bringing here.
The note is called āINR Pressure ā The Downside of SIPs.ā And the argument lands hard, because itās pointing the finger at the one thing weāve all been celebrating for the last two years.
In Jefferiesā own words, via Mahesh Nandurkar:
āNot current account deficit (CAD), but all-time low capital flows is the culprit for INR pressure. Equity market driven outflows accounted for $78 billion over the last two years, as strong domestic flows provided an easy exit to foreign capital escaping an expensive market.ā
Let that sit for a second. The same SIP wall weāve been proud of, the one absorbing every FPI dump without letting Nifty crack, is according to Jefferies the reason FPIs were able to exit at scale without consequence. And the place where that consequence finally showed up is the rupee.
The numbers behind the claim
Per the Jefferies note:
- FPIs alone have offloaded a net $44 billion of Indian equities since April 2024
- FPIs sold a record $21 billion of Indian equities in FY26 and have continued selling in FY27
- Capital account surplus declined to just around 0.5% of GDP during FY25-26, the lowest ever, versus a 2.6% surplus during the prior 10 years
- āStrong domestic flows (strong MF flows thanks to SIPs and tax advantage for equity investments, higher equity allocation by EPFO and NPS) continue to absorb heavy foreign selling in equity markets. Consequently, the BoP was in negative during the past two years and another negative BoP year is in the offing.ā
What the AMFI data tells us, just for April 2026
This is the part that makes the Jefferies argument tangible. The AMFI Monthly Report for April 2026 was released a couple of weeks ago, and the scale of whatās happening in one month is honestly staggering:
- Net inflow into equity mutual funds: ā¹38,440 crore (~$4.6 billion) in a single month
- Total open-ended equity AUM: ā¹35.74 lakh crore (~$420 billion). This is the firepower.
- Hybrid schemes net inflow: ā¹20,565 crore, most of which is also indirectly equity-linked
- Passive (index + ETF) net inflow: ā¹20,082 crore, quietly almost matching active equity
- Grand total net inflow across all open-ended schemes: ā¹3.27 lakh crore in April alone
Where the equity money actually went is telling. Flexi Cap led at ā¹10,148 cr, followed by Small Cap (ā¹6,886 cr), Mid Cap (ā¹6,551 cr), and Large & Mid Cap (ā¹4,490 cr). Pure Large Cap funds got only ā¹2,525 cr. The Indian retail investor is now structurally buying down the cap curve, into exactly the segments where FPIs have been the heaviest sellers.
To put $4.6 billion of equity inflow in one month into perspective: thatās roughly a quarter of the entire $21 billion FPIs sold across all of FY26. The SIP machine isnāt a buffer anymore. Itās the market.
Whatās actually being claimed here
The clickbait reading is āSIPs are bad for the rupee.ā Thatās the wrong reading.
The Jefferies argument is more layered. When an FPI sells Indian equity, they donāt keep the rupees. They convert back to dollars. So every $1 billion FPIs liquidate becomes $1 billion of fresh dollar demand in the FX market. Domestic SIPs absorbed the equity leg of that trade. They didnāt absorb the FX leg. That FX leg has to clear somewhere, and where itās clearing is the spot rate.
The mechanism is almost elegant. The deeper our domestic flows, the easier it becomes for foreign capital to exit in size without crashing the index. The exit just shows up in the rupee instead. Same pressure, different release valve.
This also reframes the CAD conversation. Weāve been congratulating ourselves on a tight current account, and rightly so. FY25 CAD was just 0.6% of GDP. But Jefferies is saying the FX pressure was never really about CAD. Itās about the capital account, and specifically about the gap between FPI outflows and FDI inflows that domestic flows can hide in the equity tape but cannot hide in the dollar-rupee tape.
How more mature markets have lived through this
The quick-glance comparison
 India (SIPs) |
 Korea (NPS) |
 Japan (NISA) |
|
|---|---|---|---|
| Whoās driving the flow? | Retail + EPFO/NPS via SIPs | National Pension Service | Retail investors |
| What theyāre buying | Indian equity | Foreign equity and bonds | Foreign (mostly US) equity |
| How FX pressure builds | Indirect. FPIs use SIPs as exit, convert rupees to dollars | Direct. Pension fund buys foreign assets, sells won | Direct. Retail buys foreign assets, sells yen |
| Scale | ā¹38,440 cr equity inflow in April 2026 alone; ~$78bn equity-driven outflow over 2 years | ~$542bn NPS overseas assets | Ā„10.4tn ($66bn) overseas buying in 2024 |
| Currency impact | INR at record lows near ā¹95 | Won near 1,500/USD, 16-year lows | Yen down 15%+ in a year, near Ā„161/USD |
| What authorities did | Mostly RBI spot intervention so far | BoK-NPS swap line ($65bn cap), strategic FX hedging by NPS | Largely accepted as new structural equilibrium |
| Underlying driver | Indian equities seen as expensive by FPIs | Domestic diversification, overseas return-seeking | Tax-free overseas investing, low domestic yields |
India isnāt the first market to run into this. Korea and Japan have been living the same story for years.
Korea is the closest mirror, with the polarity reversed. Koreaās NPS, the National Pension Service, keeps increasing its overseas allocation. The result has been structural depreciating pressure on the won. A local FX dealer told Reuters that āapart from global factors, for 90% of the time in recent weeks it was continued outflows by the NPS that took the won down.ā The won has hovered near 1,500 to the dollar despite repeated government efforts.
The difference from India is the direction of the flow. In Korea, the pension fund itself is generating the FX outflow. In India, the SIP investor is buying domestic equity but is effectively financing someone elseās FX outflow. The currency outcome is the same.
Whatās instructive is what Korea actually did about it. The Bank of Korea maintains a direct swap line with the NPS that lets it secure dollars at a prearranged rate instead of buying in the spot market. The government raised the cap on this facility from $50 billion to $65 billion last year. In December 2025, NPS activated a new framework for strategic FX hedging, effectively becoming a source of dollar selling and won demand to counter downward pressure on the currency. They didnāt try to slow down the domestic investment flow. They built FX plumbing around it.
Japanās NISA story is the other half. Since the revamped NISA, Japanese retail investors purchased Ā„10.4 trillion (about $66 billion) worth of overseas equities and funds in 2024, the highest level since 2015. Individuals have been pouring around Ā„1 trillion a month into international investments, which analysts say might have added Ā„0.5 to Ā„1 per dollar to the exchange rate every month. BofAās Adarsh Sinha called the trend āunprecedentedā and said itās ābeen the reason that the yen has been much weaker for longer than people generally expect.ā
Japan ran the same retail-flow-meets-currency math as India, in the opposite direction. There, retail money goes out to buy foreign (mostly US) equity, creating direct dollar demand. Here, retail money stays in to buy Indian equity, but the FPIs it bought from convert back to dollars on the way out. Both end up with a weaker home currency. Morgan Stanley is essentially treating it as the new equilibrium: āas Japanese households invest in foreign assets via investment trusts to hedge against inflation, the yen could weaken over the long term.ā
The US doesnāt really map onto this because the dollarās reserve-currency status means 401(k) flows arenāt the marginal price-setter for the currency. India, Korea, and Japan are the relevant comparison set.
So is this a negative side of SIPs?
I donāt think the right answer is yes or no. Itās both, in different timeframes.
In the short term, yes, we have to mentally separate two things weāve been conflating. The strength of domestic flows is real, and itās genuinely keeping our equity market from doing what would otherwise be a violent repricing. But that same strength is taking the pressure that would have shown up in equities and routing it into the rupee instead. We were never really getting the absorption for free. We just werenāt looking at where the cost was showing up.
In the longer term, Jefferies itself flags the actual fix. A potential valuation correction, AI trade unwinding, and the Strait of Hormuz opening for business could help reverse the ongoing foreign outflows. In other words, when Indian equities become a buy again on a relative basis, FPIs come back, the capital account surplus rebuilds, and the FX side normalises. The SIP flow isnāt the problem. The valuation gap thatās making FPIs sell into the SIP flow is the problem.
The deeper question is what the new equilibrium looks like once domestic flows are structurally this large. The April AMFI numbers make it clear that the SIP run-rate isnāt going back to 2019 levels. EPFO and NPS allocations to equity arenāt going down. So whether FPIs return or not, the next decade is going to be one where domestic demand and the resulting FX consequences are a much bigger variable than they used to be. Korea and Japan suggest that variable doesnāt go away on its own.
What do you think
If Jefferies is right that domestic SIP flows are now the marginal price-setter for the rupee, what do you think the next RBI playbook looks like, a Korea-style FX swap framework around EPFO and NPS, or do we just accept structurally weaker INR as the price of getting Indian savings into equities?