India's Currency Crisis Creates $25 Billion Trade Deficit and Sparks India ETF Interest

The Indian rupee’s collapse to historic lows marks a significant turning point for equity investors considering India exposure. With the currency plummeting against the U.S. dollar in early 2026, the nation’s trade deficit has ballooned to roughly $25 billion—a concerning indicator for the country’s economic health. Yet this very weakness has created an intriguing paradox for international ETF investors: fundamentally sound Indian companies are now available at currency-adjusted valuations, even as macroeconomic headwinds persist.

The MSCI India Index declined 6.4% as of late January 2026, while the rupee touched an unprecedented low of 92 per USD. Over the full year 2025, the broader index returned just 2.2% in dollar terms, significantly lagging the 29.9% gain in MSCI Emerging Markets. This underperformance, combined with geopolitical tensions and capital flight, has created a complex investment landscape. However, analysts point to an upgraded growth forecast from the IMF as a potential bright spot—suggesting the economy’s underlying fundamentals may outpace its currency weakness.

Economic Pressures Driving the Rupee’s Historic Decline

Three converging challenges have hammered the Indian rupee in recent weeks. First, foreign portfolio investment (FPI) has reversed sharply, with approximately $18 billion withdrawn throughout 2025. This capital flight accelerated into 2026, as international investors rotated into cheaper alternatives in China and safer havens globally. Early January saw $846 million in additional outflows over just two trading sessions.

Second, India’s import burden has become unsustainable. As a major buyer of crude oil and electronics, the nation’s trade deficit has widened significantly—with that roughly $25 billion monthly strain forcing domestic corporations to aggressively purchase dollars for hedging purposes. This currency demand from importers has compounded downward pressure on the rupee. Additionally, geopolitical uncertainty surrounding U.S. trade rhetoric and negotiations over a key bilateral trade deal have heightened investor anxiety, triggering a broader “risk-off” rotation.

Rising energy and commodity prices have further strained the balance sheet, leaving India vulnerable to external shocks at a moment when domestic capital is also fleeing the market.

IMF’s Growth Upgrade: A Counter-Signal to Currency Weakness

Despite currency turmoil, the International Monetary Fund recently raised India’s 2026 growth forecast to 6.4%, up 20 basis points from prior expectations. This upgrade underscores a critical distinction: while the “price” of India’s economy (its currency) is deteriorating, the “engine” driving productivity may actually be accelerating relative to China, the United States, and other developed markets.

For ETF investors, this creates a classic value opportunity. Profitable Indian firms are trading at discounts due to currency depreciation, while the underlying economy continues expanding. However, investors should move carefully, as further rupee weakness and volatile capital flows remain real risks to position sizing.

Three India ETFs Worth Considering

WisdomTree India Earnings Fund (EPI) offers exposure to 557 profitable Indian enterprises with $2.58 billion in assets. Its largest holdings—Reliance Industries (7.05%), HDFC Bank (5.75%), and ICICI Bank (5.25%)—represent the financial and energy backbone of the Indian economy. The fund gained 2.4% over the past 12 months and carries an 84 basis point fee.

Franklin FTSE India ETF (FLIN) provides diversified exposure across 276 large and mid-cap names with $2.75 billion under management. HDFC Bank (6.63%), Reliance Industries (6.04%), and ICICI Bank (4.53%) form its core holdings. FLIN returned 2.4% annually and charges 19 basis points—making it one of the more cost-efficient India options available to international investors.

First Trust India NIFTY 50 Equal Weight ETF (NFTY) takes a different approach by equally weighting the 51 largest Indian securities on the National Stock Exchange. Tata Steel (2.28%), Hindalco (2.24%), and JSW Steel (2.20%) anchor the portfolio. This fund delivered 3.5% returns over the past year and charges 81 basis points.

All three provide meaningful ways to access India’s growth potential while currencies remain volatile. The key is recognizing that currency depreciation, while creating headline risk, simultaneously prices in the opportunity for patient capital.