18-Year Study Shows Indian Equities Respond More to the Pace of Rupee Depreciation Than Psychological Currency Levels; Lower Oil Prices and Stable Forex Could Improve Market Sentiment

The recent weakness in the Indian rupee has once again become one of the most closely watched themes in financial markets. As the currency hovers near historic lows against the US dollar, discussions have largely centred on whether the rupee could breach the psychologically significant ₹100 per US dollar mark. However, a new study by Elara Capital suggests that investors may be paying attention to the wrong metric.

According to the brokerage's analysis of 18 years of market data, Indian equity markets have historically been less concerned about the absolute level of the rupee and more sensitive to how quickly the currency depreciates. Moderate annual depreciation has generally been absorbed without major disruption, whereas sharp accelerations in currency weakness have often coincided with lower market returns, weaker corporate earnings, and reduced foreign investor participation.

The findings come at a time when rising geopolitical tensions in West Asia have pushed crude oil prices higher, placing renewed pressure on India's external sector and increasing concerns over imported inflation.

Why the Rupee Is Once Again in the Spotlight

India's currency has remained under pressure in recent weeks due to a combination of global and domestic factors.

Key reasons include:

• Rising crude oil prices.

• Geopolitical tensions in West Asia.

• Strengthening US dollar.

• Global risk aversion.

• Foreign capital outflows.

As one of the world's largest crude oil importers, India remains particularly vulnerable to higher energy prices and currency fluctuations.

A weaker rupee increases the cost of imports, especially crude oil, thereby raising inflationary pressures across the economy.

Psychological Levels May Not Tell the Full Story

Whenever the rupee approaches record lows, market discussions often revolve around headline levels such as ₹95, ₹96, or ₹100 per dollar.

However, Elara Capital argues that these milestones have limited predictive value.

Instead, the brokerage believes investors should monitor the rate at which the rupee depreciates.

According to the study:

• Annual depreciation of around 2–3% has historically been well absorbed by Indian equities.

• Significant acceleration beyond that range has generally resulted in weaker market performance.

The pace of depreciation serves as a stronger indicator of underlying macroeconomic stress than the exchange rate itself.

What 18 Years of Historical Data Reveals

Elara Capital studied nearly two decades of market performance to understand how currency movements influence Indian equities.

The research found a clear relationship between rapid rupee depreciation and weaker stock market returns.

Example: Global Financial Crisis

During 2008:

• Rupee depreciation accelerated to nearly 7%.

• Previous year's depreciation was approximately 2%.

• Nifty returns declined sharply from nearly 20% to around 4%.

As currency pressures eased:

• Rupee depreciation moderated.

• Investor confidence returned.

• Nifty performance improved significantly.

The historical evidence suggests that markets recover when currency stability returns.

Three Ways Rupee Weakness Impacts Equity Markets

Elara Capital identifies three primary transmission channels through which rapid currency depreciation affects the stock market.

1. Macroeconomic Pressure

Sharp rupee depreciation is often accompanied by:

• Rising crude oil prices.

• Higher current account deficit.

• Imported inflation.

• Slower GDP growth.

These factors reduce overall economic confidence and weigh on equity valuations.

2. Foreign Investor Behaviour

Foreign Institutional Investors (FIIs) measure returns in US dollar terms.

Rapid rupee depreciation reduces dollar-adjusted returns, making Indian equities relatively less attractive.

This can result in:

• Reduced foreign inflows.

• Increased selling pressure.

• Higher market volatility.

• Weaker investor sentiment.

Stable currency conditions generally encourage greater participation from global investors.

3. Pressure on Corporate Earnings

A weaker rupee raises the cost of imported raw materials and intermediate goods.

Industries particularly affected include:

• Automobile manufacturing.

• Chemicals.

• Pharmaceuticals.

• Consumer electronics.

• Capital goods.

• Aviation.

Unless companies successfully pass on higher costs to consumers, operating margins and profitability may decline.

India's Oil Dependence Makes Currency Stability Crucial

India imports nearly 85% of its crude oil requirements.

Consequently, crude oil prices remain one of the biggest drivers of rupee movements.

Higher crude prices increase:

• Import costs.

• Dollar demand.

• Inflation.

• Fiscal pressures.

• Current account deficit.

This creates a direct link between geopolitical developments and domestic financial markets.

West Asia Conflict Adds Fresh Pressure

Renewed geopolitical tensions involving the United States and Iran have significantly increased uncertainty in global energy markets.

Concerns over supply disruptions have pushed crude oil prices higher, placing additional pressure on emerging market currencies, including the rupee.

The currency recently weakened beyond the ₹96 per US dollar level, reviving concerns over imported inflation and external sector stability.

RBI Continues to Support the Currency

Market participants believe the Reserve Bank of India (RBI) has periodically intervened in the foreign exchange market to smooth excessive volatility.

Rather than defending a fixed exchange rate, the RBI generally seeks to:

• Prevent disorderly market movements.

• Maintain financial stability.

• Preserve investor confidence.

• Control imported inflation.

Foreign exchange reserves continue to provide the central bank with flexibility in managing periods of elevated volatility.

Lower Oil Prices Could Reverse the Trend

Some economists remain optimistic about the medium-term outlook for the rupee.

According to market experts, a reduction in geopolitical tensions could significantly lower crude oil prices.

Lower energy prices would:

• Reduce India's import bill.

• Improve the current account.

• Ease inflation.

• Strengthen corporate profitability.

• Support economic growth.

• Stabilise the rupee.

A stronger currency environment would also improve India's attractiveness for foreign investors.

Corporate Earnings Showing Signs of Improvement

Apart from currency stability, analysts are also encouraged by improving earnings trends.

Positive developments include:

• Better Q4 FY26 earnings.

• Improving Q1 FY27 expectations.

• Stronger profit growth in mid-cap companies.

• Stable banking sector performance.

Improving earnings could provide additional support to equity markets if macroeconomic conditions stabilise.

Market Valuations Becoming More Attractive

Elara Capital believes current valuations have become increasingly reasonable following recent market corrections.

The brokerage highlights:

• Nifty valuations close to long-term averages.

• Improving earnings visibility.

• Better risk-reward balance.

• Potential return of foreign institutional investors.

A moderation in rupee depreciation could strengthen these positive trends further.

What Investors Should Watch

Several macroeconomic indicators will remain important over the coming months.

Key Indicators

• Rupee movement.

• Crude oil prices.

• RBI intervention.

• Inflation trends.

• Current account deficit.

• FII investment flows.

• Corporate earnings.

• Global geopolitical developments.

Monitoring these indicators together provides a more complete picture than focusing solely on currency levels.

Long-Term Growth Drivers Remain Intact

Despite near-term volatility, India's structural economic fundamentals remain strong.

Key long-term growth drivers include:

• Expanding manufacturing sector.

• Infrastructure development.

• Rising domestic consumption.

• Digital transformation.

• Financial inclusion.

• Formalisation of the economy.

• Increasing household financial savings.

These factors continue to support India's long-term investment case.