How Rupee Depreciation Is Creating Opportunities for Foreign ETF Investors in India

As 2026 unfolds, India’s currency market has become a focal point for global investors seeking exposure to the nation’s growth story. The Indian rupee’s recent plunge to historic lows against the U.S. dollar—touching 92 INR per USD as of late January—has placed international attention squarely on the country’s equity market dynamics and the foreign ETF vehicles that provide international exposure to these assets. For foreign investors evaluating India as an investment destination, this moment presents both compelling opportunities and notable risks that deserve careful consideration.

India’s economic narrative remains fundamentally strong, yet currency headwinds have created a complex environment for those deploying capital through foreign ETF in India markets. Over the past 12 months through mid-December 2025, the MSCI India Index delivered a modest 2.2% return in dollar terms, significantly lagging the 29.9% performance of MSCI Emerging Markets. The year-to-date 2026 picture has deteriorated further, with the MSCI India Index declining 6.4% as of January 23, 2026. However, this apparent weakness masks a deeper story—one that savvy international ETF investors are beginning to recognize: strong domestic fundamentals at currency-adjusted valuations.

The Perfect Storm: What’s Driving India’s Currency Pressure

Understanding the rupee’s weakness requires examining multiple convergent forces that have conspired to pressure the Indian currency simultaneously.

The Foreign Capital Exodus: International portfolio investors have been systematically retreating from Indian equities throughout 2025 and into early 2026. According to Reuters reporting, foreign funds withdrew approximately $18 billion from Indian equity markets during 2025 alone. This outflow accelerated in January 2026, with $846 million in foreign capital departing in just the first two trading sessions of the month. This capital reallocation reflects investors’ flight to safety amid elevated geopolitical uncertainty and a global reassessment of emerging market valuations.

Geopolitical Tensions and Trade Uncertainties: Mounting tensions between major powers, particularly around disputed territories and potential tariff escalation, have created a “risk-off” sentiment that particularly impacts India. Trade negotiations between the U.S. and India reached an impasse in early 2026, adding another layer of uncertainty for investors. These geopolitical headwinds have made traditionally safe-haven assets like gold and U.S. treasury securities more attractive relative to emerging market equities.

The Structural Import Challenge: India’s reliance on energy and electronics imports remains a significant structural issue. Trade deficits swelled beyond $25 billion in recent weeks, driven by elevated crude oil prices and rising raw material costs. Domestic Indian companies scrambling to hedge their foreign currency exposure have aggressively accumulated U.S. dollars, creating sustained downward pressure on the rupee in the process.

The Contrarian Case: Why Fundamentals Tell a Different Story

Despite the currency weakness, India’s underlying economic engine continues to outperform global peers. The International Monetary Fund raised India’s 2026 GDP growth forecast to 6.4%—a 20 basis point upgrade that reflects confidence in the nation’s productive capacity. This divergence between currency prices and economic productivity creates a classic asymmetry that value-oriented international investors understand well: buying productive assets at currency-adjusted discounts.

For those evaluating foreign ETF in India as a portfolio component, the current environment presents compelling entry valuations despite near-term currency volatility. As long-term international investors recognize, short-term currency fluctuations often mask longer-term wealth creation opportunities in high-growth markets.

Looking ahead through 2026, currency pressures may intensify if geopolitical tensions persist or if the Federal Reserve maintains elevated interest rates. However, analysts note that India’s strong growth trajectory provides an important counterweight to these cyclical pressures. The near-term outlook remains cautious, but the medium-term case for exposure to India’s growth continues to strengthen.

International Investment Vehicles: Three ETF Options for Foreign Investors

For international investors seeking diversified exposure to India’s equity markets, three ETF options merit consideration based on asset size, composition, and track record.

WisdomTree India Earnings Fund (EPI) offers exposure to 557 profitable Indian companies with $2.58 billion in assets under management. The fund’s concentration in quality businesses is evident from its top holdings: Reliance Industries (7.05%), HDFC Bank (5.75%), and ICICI Bank (5.25%). Over the past 12 months, EPI returned 2.4% despite the currency headwinds, charging investors 84 basis points in annual fees. This fund appeals to foreign ETF investors prioritizing earnings quality over broad market exposure.

Franklin FTSE India ETF (FLIN) provides more diversified exposure across 276 large and mid-cap Indian companies, managing $2.75 billion in total assets. Its top three holdings reflect a broader market representation: HDFC Bank (6.63%), Reliance Industries (6.04%), and ICICI Bank (4.53%). FLIN delivered 2.4% annual returns over the past year while charging 19 basis points—among the lowest fees in the Indian ETF space. This option suits international investors seeking broad market participation at reasonable cost.

First Trust India NIFTY 50 Equal Weight ETF (NFTY) takes a distinctive equal-weight approach to India’s 50 largest stocks, with $160.9 million in assets. The fund’s top holdings—Tata Steel (2.28%), Hindalco (2.24%), and JSW Steel (2.20%)—reflect its commitment to equalizing exposure across large-cap securities listed on India’s National Stock Exchange. NFTY posted 3.5% returns over the past year while charging 81 basis points, making it an interesting choice for foreign investors seeking less concentration risk than traditional market-weight approaches.

Making the Call: Strategic Considerations for Foreign ETF Investors

The confluence of currency weakness and strong economic fundamentals creates what financial professionals call a “valuation inflection point.” For foreign ETF investors with long-term horizons and conviction in India’s growth story, the current environment warrants serious portfolio consideration—balanced against realistic assessments of near-term currency volatility and ongoing geopolitical uncertainties. The decision ultimately depends on individual risk tolerance, time horizon, and conviction regarding India’s ability to sustain high growth rates despite macroeconomic headwinds.