India's Record Currency Weakness Amid $25 Billion Trade Deficit: What ETF Investors Should Know

As India enters 2026, the nation’s currency market faces unprecedented headwinds. The Indian rupee has reached historic lows against the U.S. dollar, arriving just before Republic Day celebrations amid a widening trade deficit. While India’s economic fundamentals remain resilient, with a 6.4% growth forecast from the IMF, currency weakness has created a complex investment landscape. The country’s $25 billion monthly trade deficit—driven by surging crude oil and electronics imports—underscores the macroeconomic pressures that are pushing the rupee to all-time lows, raising critical questions for ETF investors considering India exposure.

Market Performance Under Pressure

The numbers tell a sobering story. The MSCI India Index rose just 2.2% in dollar terms through December 19, 2025, substantially underperforming the broader MSCI Emerging Markets Index, which gained 29.9%. The year opened with additional weakness: as of January 23, 2026, the MSCI India Index had declined 6.4% while the Indian rupee touched the 92 per USD mark—its lowest point in history.

This divergence between India’s fundamental growth story and its asset price performance reflects deeper market dynamics. Foreign portfolio investors (FPI), who typically drive capital into emerging markets, have been net sellers. In 2025 alone, foreign funds withdrew approximately $18 billion from Indian equities as global risk sentiment shifted. The outflows accelerated into 2026, with another $846 million departing in the first two trading sessions of January as investors rotated toward cheaper valuations in competing markets like China.

The Perfect Storm: Converging Pressures on the Indian Rupee

The rupee’s weakness is not a standalone event but the culmination of multiple intersecting pressures that have intensified since late 2025.

Capital Outflows and Global Risk Sentiment: The primary driver has been significant foreign portfolio withdrawals seeking safer assets amid geopolitical tensions. As investors globally reassess risk exposure, India—despite its growth potential—has seen capital redirected toward gold, U.S. Treasuries, and other traditional safe havens. This outflow dynamic continues to weigh on the currency.

Capital Flight and Trade Imbalance: Understanding the $25 Billion Pressure: As a major importer of energy, electronics, and raw materials, India faces a structurally wider trade deficit. The $25 billion monthly trade gap reflects elevated crude oil import costs and rising semiconductor expenses as domestic companies lock in dollar purchases to hedge currency exposure. Each rupee depreciation increases import costs, creating a vicious cycle that pressures the currency further.

Geopolitical Uncertainty: Rhetoric around the Greenland dispute and potential U.S. tariffs on nations with Russian trade links have rattled global markets. Negotiations on a key U.S.-India trade deal stalled in early 2026, adding another layer of uncertainty to the investment environment. This “risk-off” sentiment has disproportionately affected India given its emerging market status and trade dependencies.

Beyond Weakness: Why India’s Growth Story Remains Intact

Despite currency headwinds, India’s economic engine continues firing on multiple cylinders. The IMF’s recent upgrade of India’s 2026 growth forecast to 6.4%—a 20 basis point improvement—signals confidence in the nation’s productive capacity. The paradox is striking: while the currency (the “price tag” of the economy) has weakened dramatically, underlying productivity metrics suggest an economy outpacing global peers, including China and the United States.

For ETF investors, this creates a classic contrarian opportunity. As valuations compress due to rupee weakness, investors are effectively purchasing high-quality Indian companies at currency-adjusted discounts. The key consideration is managing the timing and currency-flow risks that accompany such positioning.

Strategic ETF Positioning for Indian Market Exposure

For investors seeking India exposure, three ETFs stand out given their size, composition, and recent performance:

WisdomTree India Earnings Fund (EPI): With $2.58 billion in assets under management, EPI provides access to 557 profitable Indian companies. The fund’s portfolio is anchored by blue-chip names—Reliance Industries at 7.05% allocation, HDFC Bank at 5.75%, and ICICI Bank at 5.25%. EPI has delivered a 2.4% return over the past twelve months despite the challenging currency environment. The fund carries an expense ratio of 84 basis points.

Franklin FTSE India ETF (FLIN): Managing $2.75 billion, FLIN concentrates on 276 large and mid-cap Indian companies. Its top positions mirror market leadership: HDFC Bank (6.63%), Reliance Industries (6.04%), and ICICI Bank (4.53%). FLIN has also returned 2.4% over the year and charges 19 basis points in fees—notably lower than its peers—making it an attractive option for cost-conscious investors.

First Trust India NIFTY 50 Equal Weight ETF (NFTY): At $160.9 million in assets, NFTY takes a different approach through equal-weight indexing of India’s 51 largest and most liquid stocks traded on the National Stock Exchange. This methodology provides exposure to companies like Tata Steel (2.28%), Hindalco (2.24%), and JSW Steel (2.20%), with more balanced sector representation. NFTY has outperformed its peers with a 3.5% return over the past year despite charging 81 basis points.

The Investment Outlook: Opportunity Tempered by Caution

For portfolio managers evaluating India exposure, the currency weakness presents both opportunity and risk. The positive case is clear: valuations have compressed, economic growth remains robust, and global investors have historically found that currency-adjusted returns in strong-growth markets compensate for near-term volatility.

However, proceed with strategic caution. If geopolitical tensions persist or the Federal Reserve maintains elevated interest rates, the rupee could test even lower levels. Further currency depreciation amplifies risk for unhedged foreign investors. Capital flow dynamics remain fragile, and any additional geopolitical escalation could trigger renewed outflows.

The path forward suggests a measured approach: investors comfortable with emerging market volatility and currency fluctuation can use current weakness as a buying opportunity, particularly for long-term positions. The IMF’s growth upgrade provides fundamental support, and India’s structural story—demographic dividend, rising consumption, manufacturing shift—remains compelling. Yet sizing positions carefully relative to overall portfolio risk tolerance remains essential in this uncertain environment.