Forex traders say the main reason the rupee weakened in December was sustained selling by foreign portfolio investors (FPIs). Over the last few months, foreign investors repeatedly offloaded Indian equity and debt holdings — often amounting to several billion dollars a day — putting steady pressure on the currency.
Why FPI selling matters
FPIs move large sums quickly. When they sell Indian stocks and bonds, they convert rupees back into foreign currency to repatriate funds. That increases the supply of rupees in foreign exchange markets and raises demand for dollars, which pushes the rupee lower.
How the selling translated into rupee weakness
Traders point to a simple supply-and-demand effect. Continuous outflows over weeks reduce foreign exchange buffers and can widen the gap between spot and forward rupee rates. In December, this repeated pattern of selling created sustained downward pressure rather than brief, reversible moves.
Immediate market effects
- Equity markets: Large FPI exits can weigh on share prices as sentiment weakens.
- Debt yields: Selling of bonds can push yields higher, raising borrowing costs.
- Volatility: Currency and interest-rate volatility tends to rise when outflows are persistent.
What to watch next
Key indicators to monitor include daily FPI flow numbers, global risk sentiment, and domestic macro data. Market participants will also watch how the central bank responds to sustained outflows — through currency market intervention or policy signals — and whether foreign flows stabilize as global conditions change.
In short, repeated FPI selling over recent months was the dominant factor behind the rupee’s softness in December, and future flows will likely determine whether the currency stabilises or faces further pressure.