India ETF Counter-Cyclical Strategy Guide: Investment Opportunities and Risks Amid the Rupee's Historic Lows

At the beginning of 2026, India’s financial markets face a “currency crisis” test. The rupee against the US dollar has fallen to a historic low of 92:1, implying an external capital outflow of approximately $2.2 million. This reveals a subtle shift in global investors’ attitude toward Indian assets. Although India’s economic growth narrative remains resilient, the rupee’s depreciation has become a Damocles sword hanging over ETF investors. For those betting on India’s rapid development, the current market presents a classic paradox: strong fundamentals versus currency depreciation risk.

The Triple Pressures Behind the Rupee Depreciation

India’s rupee reaching new lows is not an abrupt event but the inevitable result of multiple pressures converging.

Massive Capital Outflows

The abandonment by foreign investors is a direct driver of the rupee’s pressure. Data shows that in 2025, foreign portfolio investments (FPI) withdrew about $18 billion from Indian equities, a staggering figure. In early 2026, this outflow continued, with $846 million leaving in just the first two trading days of January. Investors are shifting their focus to cheaper emerging markets like China. This large-scale capital outflow directly depresses the rupee’s exchange rate.

Rising Geopolitical Risks

Statements from Washington regarding disputes over Greenland and tariffs on Russia’s trading partners continue to unsettle markets, triggering a sell-off in risk assets globally. Meanwhile, trade negotiations between the US and India stalled in early 2026, heightening concerns about India’s export outlook. Geopolitical uncertainties drive investors to seek safe havens, with Indian assets bearing the brunt.

Trade Imbalance Drag

India, a major importer of energy and electronics, saw its trade deficit expand to over $25 billion last month. Rising oil prices have increased import costs, forcing domestic companies to buy more dollars to hedge risks, further weakening the rupee. The fragility of India’s trade structure is exposed at this moment.

Opportunities in the Paradox: India’s Economic Outlook for 2026

Although the rupee is depreciating, India’s economic engine remains intact. This is the most paradoxical aspect of the current situation.

The International Monetary Fund (IMF) recently raised India’s 2026 growth forecast to 6.4%, up 20 basis points from previous estimates. This data provides a key reference: while the currency (the “price tag” of the nation’s economy) is weakening, economic productivity (the “engine” of the country’s economy) is surpassing that of global peers, including China and the US.

The MSCI India Index gained only 2.2% in 2025 (USD terms), starkly contrasting with the 29.9% rise of the MSCI Emerging Markets Index. However, in early 2026, despite a 6.4% decline before January 23, this seemingly negative performance actually creates a good opportunity for dollar-cost averaging or phased accumulation. The rupee’s depreciation means the relative prices of high-quality Indian companies are lowered, presenting a classic “buy low” opportunity for long-term investors.

Evaluation of India ETF Investment Options

For investors wanting to participate in India’s growth but with caution, three mainstream ETF products are worth monitoring:

WisdomTree India Earnings Fund (EPI)

With a size of $2.58 billion, this fund tracks 557 profitable Indian companies. Its top holdings are Reliance Industries (7.05%), HDFC Bank (5.75%), and ICICI Bank (5.25%). The fund’s return over the past year was 2.4%, with an expense ratio of 84 basis points. Its strength lies in focusing on earnings quality, suitable for investors confident in company fundamentals.

Franklin FTSE India ETF (FLIN)

This ETF has a size of $2.75 billion, covering 276 large- and mid-cap Indian companies. Its top holdings are HDFC Bank (6.63%), Reliance Industries (6.04%), and ICICI Bank (4.53%). The annual return is also 2.4%, but with a much lower expense ratio of 19 basis points, making it an attractive low-cost passive long-term allocation.

First Trust India NIFTY 50 Equal Weight ETF (NFTY)

Although the smallest in size at $160.9 million, its equal-weight design offers a unique risk profile. It includes the 51 most liquid securities listed on the National Stock Exchange (NSE) of India, with top holdings in Tata Steel (2.28%), Hindalco (2.24%), and JSW Steel (2.20%). Its return over the past year was 3.5%, with an expense ratio of 81 basis points. The equal-weight structure exposes investors to more small- and mid-cap stocks, increasing both risk and potential return.

Investment Decision Framework

The current environment presents a real dilemma for ETF investors. On one hand, the rupee’s depreciation offers currency arbitrage opportunities for local currency investors; on the other hand, the risk of further depreciation cannot be ignored, especially if geopolitical tensions persist or the Federal Reserve maintains high interest rates.

It is recommended to adopt a phased dollar-cost averaging approach rather than a lump-sum investment. The ongoing capital outflows at the $2.2 million level suggest market instability remains. Additionally, closely monitor developments in India’s trade policies, US-India negotiations, and global risk sentiment, as these will directly influence the rupee’s future trajectory.

Based on the principle of prioritizing growth quality, FLIN’s low expense ratio and balanced allocation may be most suitable for conservative long-term investors; while risk-tolerant investors might find NFTY’s equal-weight design offering more potential for excess returns. Regardless of the choice, view this investment as a long-term (3+ years) commitment rather than a short-term arbitrage tool.