Falling Rupee, Diverging Signals: What Currency Swings Mean for India Deals

At recent investor discussions, one theme is surfacing with increasing consistency: India continues to be among the most attractive growth markets globally.

For global investors deploying dollar capital, the question is no longer just how fast Indian companies can grow: It is how much of that growth ultimately holds after rupee depreciation over the life of an investment. This concern has sharpened in recent weeks as the rupee has come under pressure amid geopolitical tensions, rising oil prices and foreign outflows.

Early this week, the rupee hit record lows near 95 per dollar before the Reserve Bank of India stepped in with tighter measures to curb speculative forex activity. With this, the rupee has lost around 6.5 - 6.7 percent of its value against the dollar over the past 12 months.

That is changing the way private capital reads India. The market still offers scale, growth and a deepening exit environment, but currency is no longer a background macro variable. It is increasingly part of the core investment thesis.

Currency As A Factor

To be clear, the currency risk is not new. Most funds have long accounted for a 2.5-3% annual depreciation while underwriting India deals. But what is changing is the magnitude and unpredictability of the movement. In volatile periods like the current geopolitical situation, that assumption can widen, turning currency from a marginal adjustment into a meaningful determinant of returns.

“Investing in any market, investors factor these risks in their return expectation,” said Devendra Agrawal, founder of Dexter Capital Advisors - an investment bank. “Currency risk is maybe 2-3%, that’s how it works. The issue comes when you have sharp movements, which are not factored in.”

The broader market backdrop helps explain why that is becoming more important. A recent McKinsey and IVCA survey showed India emerging as the top Asia-Pacific destination for private market investors, with 31% of the more than 50 limited partners ranking India first and 76% placing it in their top three. Deal value rose to $207 billion between 2021 and 2025. 

However, the exposure or sensitivity to currency movements differ based on the nature of the investor. In private equity, where underwriting is more tightly modelled and linked to cash flows and exit multiples, currency matters more directly. The rupee assumption is explicitly built into valuation and return thresholds.

In venture capital, the effect is more diluted. “VC is even longer term,” said Harish Huyalkar, head of portfolio and fund management, 360 One Asset - a leading wealth management firm. “You are playing for such a large outcome that this does not matter as much. If your expected return is 30% to 35%, for example, a 1% or 2% impact from currency does not become a deal breaker.”

The Math Behind The Returns

The impact of currency devaluation is not hard to understand. To generate a 15% dollar internal rate of return, funds often need to target closer to 18 to 20% in rupee terms. Over a typical five-to-six year holding period, even steady, predictable currency depreciation compounds and might erode realised returns.

Huyalkar said this has long been part of the underwriting discipline. “Historically, we model 3% to 4% annual depreciation in the rupee,” he said. “So over a five-year period, maybe it is 20 to 25% compounded. Now if one year sees 10 to 11%, the question is how much of that is temporary versus structural.”

While export-oriented businesses can benefit from rupee depreciation, for purely domestic businesses, the effect lands directly on valuation. “You need to be compensated for the rupee depreciation,” Huyalkar said, “and to that extent, you are effectively lowering the entry valuation.”

That is why deals that look attractive on paper can become harder to justify once currency, taxes and exit-related leakages are layered in. A business delivering mid-teens growth in rupee terms may still fall short of dollar return expectations.

These challenges become more acute when currency moves sharply. Recent weeks have seen a combination of rising oil prices, strong exit-driven outflows and sustained foreign portfolio selling, all of which have added pressure on the rupee. Foreign investors sold a record $12.14 billion in Indian equities and $1.61 billion in bonds amidst the recent tensions in West Asia.

FDI too has seen strong outflows in recent months. “While gross FDI inflows have been steady at around $80 billion, outflows have also increased because of strong exits,” Huyalkar said. “So net FDI has been close to flat, and that adds to currency pressure.”

For investors, this is not only a modelling issue. It is also a behavioural one. “When portfolio value drops sharply due to currency, it creates pressure,” Agrawal said. “For a global investor, what was 100 can become 60 or 70 in their home currency. And that might create a different behaviour.”

In public markets, this can trigger a quick domino effect. In private markets, the reaction is slower, but the underlying pressure on returns and confidence is no less real.

Mitigating Strategies

The currency fluctuations have prompted at least some general partners to explore alternate ways to limit the damage. Currency assumptions are being built more conservatively into underwriting models, and some larger funds are using hedging tools.

“Mature GPs may think of hedging via forward contracts,” Agrawal said. “But there is a cost, and you can’t hedge fully for long durations. It is not a perfect solution.”

The response also depends on the business itself. “If it is a domestic business, you explicitly model rupee depreciation,” Huyalkar said. “If it is an export-oriented business, you have a natural hedge because revenues are in dollars.”

That is why sectors with dollar-linked revenues, such as IT services, pharmaceuticals and global SaaS, can look more comfortable from a currency perspective. They offer at least partial protection because a weaker rupee can lift reported earnings in local currency terms.

Fundraising And Exits

Experts feel that the current volatility is already making investors more cautious, especially first-time entrants and those with limited exposure to India. “This definitely causes concern in the mind of future commitments,” said Agrawal. “It may reduce the inflow that would come from global institutional LPs.”

That said, there may be no long-term impact on the appetite for India as well; it is just being filtered through a more exacting return lens. “Private equity investors look at what will grow in India and where they will get the highest multiple at exit,” Huyalkar said. “Currency is secondary. Nobody will invest just because of a currency hedge.

Moreover, the improving exit environment in India has softened one of the biggest historic concerns. Exits more than doubled to $120 billion between 2021 and 2025, helped by a stronger IPO and M&A market, according to the McKinsey report. That has made India look less like a one-way capital market and more like a place where money can actually come back.

While currency affects realised returns, it does not by itself rewrite the exit playbook. Market conditions remain the bigger determinant. “Exits are more dependent on equity markets than currency,” Huyalkar said. “If valuations are not attractive in rupee terms, investors will wait. First you need the right valuation, then you convert into dollars.”

But over time, persistent currency volatility could still alter investor behaviour in subtle ways. There may be greater emphasis on entry discipline, stronger return buffers and more attention to exit visibility. Managers with better risk management capabilities could become more attractive to LPs.