Despite concerns over crude oil prices, foreign investor outflows and currency weakness, DSP Mutual Fund believes the current environment presents an attractive opportunity to allocate to rupee-denominated assets across equities and bonds.
In a recent note titled “This Is The Time To Buy Rupee Assets, Not Bet Against Them,” the fund house highlighted five major reasons why it believes that 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 towards rupee-denominated assets across both equities and bonds.
According to the brokerage's note, one of the strongest reasons comes from the Real Effective Exchange Rate (REER), which measures the currency’s competitiveness on a trade-weighted basis.
The fund house noted that the rupee’s REER at the end of April 2026 stood at 89.7 as per BIS data, and it is estimated to have slipped below 88 when USDINR breached 96.9 on May 20, 2026.
The report argued that the rupee currently appears fundamentally undervalued, creating what it described as a “strong margin of safety” for investors allocating to rupee assets.
Another key factor highlighted was the narrowing inflation gap between India and the United States. Historically, India’s inflation differential with the US spread averaged around 3.5% to 4%, but that gap has now narrowed significantly to nearly 1% to 2%, according to the report. Over the last 12 months, US CPI averaged 2.8% while India’s CPI averaged 2.3%, putting India in a relatively favourable position.
DSP MF said a structurally narrower inflation differential implies the long-term depreciation rate of the rupee against the US dollar will decelerate, not quicken.
The report also pushed back against concerns over India’s Balance of Payments (BoP), stating that fears are currently driven more by expectations of permanently elevated crude oil prices rather than actual external sector stress.
According to the note, India’s growing services exports and remittance inflows provide a substantial cushion against external pressures. Services exports are currently running above $418 billion annually, while inward remittances exceed $135 billion, creating what the report described as a “net invisible shield” of nearly $349 billion.
DSP MF believes this buffer is strong enough to offset most of India’s merchandise trade deficit unless crude oil prices remain above $120 per barrel for a prolonged period.
On the equity side, the note highlighted improving valuation comfort in largecap stocks. While foreign portfolio investor (FPI) and foreign direct investment (FDI) flows have remained muted due to concerns over expensive valuations, DSP MF believes largecap Indian equities have already undergone meaningful re-rating corrections.
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The report noted that several largecap companies are now trading below long-term average valuation multiples, with some segments available at valuations close to COVID-era or Global Financial Crisis lows.
It also pointed out that high-quality Indian businesses continue to generate return on equity (ROE) levels of 18–20%, which remains relatively rare among emerging markets.
DSP MF further said that concerns around RBI’s declining forex reserves and forward book positions should be viewed in the context of historical cycles rather than as signs of structural stress. The report observed that currency markets, capital flows and reserve positions are inherently cyclical in nature.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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