The Indian stock market could see a surge in Foreign Portfolio Investment (FPI) inflows as the U.S. dollar weakens. The dollar index has fallen 11% in the first half of 2025, marking its steepest decline since 1973 and its weakest six-month performance since 2009. As of July 4, 2025, the dollar index is at its lowest level since February 2022, trading at 97.
Historically, there has been a close relationship between the direction of the U.S. dollar and the performance of emerging market assets. Emerging market equities typically underperform when the dollar strengthens.
A weaker dollar can attract more inflows into emerging markets as investors seek higher returns in a depreciating-dollar environment, which can stimulate corporate and economic growth. Bond issuers also benefit when the cost to service their debt drops because many emerging market sovereign and corporate bonds are denominated in U.S. dollars. A weaker dollar can also cause commodity prices to rise, which can be a tailwind for emerging economies.
A weaker dollar, especially when tied to expectations of rate cuts in the U.S., generally has a positive impact on Foreign Institutional Investor behavior, as investors rotate from developed markets into emerging markets to seek higher yields. This can positively impact Indian equities by bringing more capital inflows into the country, supporting the rupee and lowering bond yields. A strong rupee and lower import costs due to a weaker dollar can improve margins for big sectors in India, such as aviation, chemicals, and consumer goods.
Lower prices for USD-denominated commodities, such as metals and crude oil, will reduce inflationary pressures and boost Indian companies, although some export sectors, such as IT and pharmaceuticals, may face challenges. Overall returns on Indian assets can also increase.
In May 2025, Indian markets experienced a surge in foreign portfolio investments, reaching ₹19,860 crore, which was the strongest month for inflows that year. However, the cumulative FPI investment from January to May remained negative at ₹92,491 crore. Even with the negative cumulative FPI, the May inflows suggested a potential shift in investor confidence, driven by a declining U.S. dollar and positive market developments.
Despite a volatile journey for FPI investments in India throughout 2024, they remained net buyers of Indian equities, totaling approximately US$50 million. While significantly lower than the previous year, this dip was expected to be temporary as India's structural growth story remained attractive. Heavy selling by FPIs in the secondary markets was offset by significant inflows into primary issuances, with 2024 being a record-breaking year for Indian IPOs. The increasing presence of domestic institutional and retail investors also provided market stability.
However, it is important to note that a strong dollar might discourage foreign investors due to higher conversion costs, whereas a weaker dollar may make investments in India more attractive. Other factors, such as high valuations and cheaper alternatives in other emerging markets, could constrain inflows. Lingering concerns over a prolonged global recession may also weigh on investor sentiment and appetite for risk assets. Furthermore, geopolitical escalations, central bank interest rate cuts, and potential US tariff sanctions could act as tailwinds for FPI inflows into Indian markets.
