When Indian Rupee Hits Record Lows: How These ETFs Navigate Currency Volatility

India’s economic growth story remains compelling at first glance, yet as the nation entered 2026, its currency market told a troubling tale. The Indian rupee touched an all-time low against the U.S. dollar, marking a pivotal moment for investors watching India’s equity landscape. This currency crisis creates a peculiar paradox for ETF investors: while rupee weakness can theoretically offer currency-adjusted entry points for foreign investors, it simultaneously signals deeper macroeconomic pressures that demand careful consideration. The scenario has placed three India-focused ETFs squarely in the spotlight for investors seeking managed exposure to Asia’s third-largest economy. Understanding what triggered this rupee depreciation, and whether the underlying economic fundamentals justify the risk, is essential before committing capital.

Understanding India’s Currency Pressure: Multiple Forces at Play

The rupee’s descent to record lows did not occur in isolation. Rather, it reflects a confluence of macroeconomic stress points that have accumulated over recent quarters. The story begins with India’s equity market underperformance—the MSCI India Index rose merely 2.2% in dollar terms through mid-December 2025, substantially lagging the 29.9% advance of the broader MSCI Emerging Markets Index. This divergence signals that investors have grown increasingly skeptical about India’s growth premium, a sentiment that materialized into tangible action through significant portfolio reallocation.

The stark reality of early 2026 reinforces this pessimism. As of late January, the MSCI India Index had retreated 6.4% year-to-date, while the rupee continued its downward spiral toward the 92-per-dollar threshold. For context, this represents one of the most acute pressure periods for India’s currency in recent memory, making the performance of India ETFs a crucial barometer for both market sentiment and underlying economic resilience.

Capital Flight and Geopolitical Headwinds

The primary culprit behind rupee weakness has been the outflow of foreign portfolio investment. Throughout 2025, foreign investors withdrew nearly $18 billion from Indian equities—a figure that continued to accelerate into 2026, with approximately $846 million in capital departing during the first two trading days of January alone. These foreign funds fled to perceived safer assets, including gold and equities in markets offering more attractive valuations, such as China, or alternative destinations perceived as lower-risk jurisdictions.

Compounding this capital exodus is a deteriorating geopolitical backdrop. Washington’s recent rhetoric surrounding potential tariff escalations and trade disputes has created a “risk-off” environment that has particularly impacted India. Negotiations for a critical U.S.-India trade agreement stalled in early 2026, removing a potential positive catalyst that might have supported rupee stability and investor confidence in Indian assets.

Import Deficit Accelerating Currency Weakness

India’s structural trade challenges have intensified the rupee’s downward pressure. As a major consumer of energy and electronics, India faces a widening trade deficit that exceeded $25 billion last month. The combination of elevated global crude oil prices and surging bullion costs has forced Indian corporations to aggressively purchase dollars to manage currency exposure on their import obligations. This hedging activity by Indian importers has directly accelerated the rupee’s depreciation, creating a self-reinforcing cycle of currency weakness that shows limited signs of abating.

A Silver Lining: IMF Growth Forecast Offers Hope

While the currency picture appears bleak, a crucial data point injects hope into the narrative. The International Monetary Fund recently upgraded India’s 2026 growth outlook to 6.4%, reflecting an upward revision of 20 basis points. This upgrade proves particularly significant because it decouples the currency’s weakness from underlying economic productivity. In essence, while the rupee—representing the “price” of the economy—struggles, the actual “engine” of the economy continues outperforming global competitors, including China and the United States.

For ETF investors, this disparity between currency performance and economic fundamentals creates a classic valuation opportunity. Foreign investors can gain access to fundamentally sound Indian companies at prices depressed by currency headwinds. However, prudent investors must acknowledge that further rupee depreciation remains a material risk, and the dynamics of future capital flows cannot be dismissed when determining appropriate ETF exposure levels.

Three India ETFs Worth Considering for Portfolio Exposure

Against this backdrop of currency volatility coupled with underlying growth strength, three ETF vehicles merit investor consideration.

WisdomTree India Earnings Fund (EPI) provides diversified exposure to 557 profitable Indian companies through a methodology focused on earnings-weighted selection. The fund commands $2.58 billion in total assets and charges 84 basis points in annual fees. Its concentrated holdings—Reliance Industries at 7.05%, HDFC Bank at 5.75%, and ICICI Bank at 5.25%—reflect India’s financial and energy sector dominance. Over the trailing twelve-month period, EPI appreciated 2.4%, demonstrating the headwinds that Indian equities have faced despite underlying profitability.

Franklin FTSE India ETF (FLIN) takes a broader approach, encompassing 276 large and mid-capitalization Indian companies with $2.75 billion in assets under management. The fund’s fee structure of 19 basis points represents a significant advantage over EPI, appealing to cost-conscious investors. FLIN similarly showcases heavyweight Indian banks and industrial concerns, with HDFC Bank (6.63%), Reliance Industries (6.04%), and ICICI Bank (4.53%) comprising the top three positions. FLIN has delivered 2.4% returns over the past year, matching EPI’s performance despite its exposure to a broader company universe.

First Trust India NIFTY 50 Equal Weight ETF (NFTY) distinguishes itself through an equal-weighting methodology applied to India’s 51 largest and most liquid securities on the National Stock Exchange. With $160.9 million in assets and 81 basis point annual charges, NFTY offers a more granular exposure profile compared to its peers. Its top holdings—Tata Steel (2.28%), Hindalco (2.24%), and JSW Steel (2.20%)—reveal a tilt toward industrial and materials companies. NFTY has outperformed its peers with a 3.5% annual return, suggesting potential alpha generation through its structural approach despite broader market headwinds.

Making the Investment Decision

For investors contemplating India ETF exposure amid current volatility, the decision hinges on conviction regarding India’s medium-term growth trajectory relative to currency risks. The IMF’s upgraded 6.4% growth forecast suggests that patient investors may be purchasing quality Indian corporate earnings at currency-adjusted discount levels. However, the path forward remains uncertain; sustained geopolitical tensions or prolonged rupee weakness could pressure these positions further. Those seeking exposure to India’s long-term growth engine while managing currency risk through position sizing represent the most appropriate candidates for these ETF vehicles.