New Delhi, May 24 : The recent weakness in the Indian rupee may be driven less by rising oil prices or concerns around the current account deficit and more by relentless domestic equity inflows through systematic investment plans (SIPs), according to a report by Jefferies.

In a note titled â??INR Pressure â?? The Downside of SIPs,â?? the brokerage said sustained foreign selling in Indian equities, coupled with strong domestic liquidity, has become a major factor weighing on the rupee.

Jefferies estimated that equity market-driven outflows have reached nearly $78 billion over the last two years, as foreign portfolio investors (FPIs), private equity firms and foreign promoters used strong domestic demand to reduce their holdings in what they consider an expensive market.

The brokerage noted that robust domestic inflows through SIPs, mutual funds and retirement-linked investments provided foreign investors with an easy exit route despite heavy selling pressure.

According to the report, FPIs sold a record $21 billion worth of Indian equities in FY26 and have continued to remain net sellers in FY27 so far.

Since April 2024, FPIs alone have offloaded Indian equities worth a net $44 billion, the report stated.

Despite the sharp foreign outflows, benchmark equity indices remained relatively stable as domestic institutional investors and retail participants continued absorbing the selling through steady SIP inflows and rising allocations from EPFO and NPS-linked investments.

However, Jefferies cautioned that this trend has weakened Indiaâ??s capital account position.

The brokerage said Indiaâ??s capital account surplus dropped to around 0.5 per cent of GDP during FY25 and FY26, the lowest level on record, compared with an average surplus of 2.6 per cent over the previous decade.

At the same time, net foreign direct investment remained subdued at nearly $5 billion during the two-year period, partly because of stake sales by promoters and private equity investors.

As a result, Indiaâ??s balance of payments has remained negative over the past two years, and Jefferies expects another weak year ahead.

Still, the brokerage believes the situation could reverse if foreign investor sentiment improves.

It pointed out that in three of the last four instances where the rupee depreciated by more than 10 per cent over a 12-month period, FPI inflows rebounded strongly in the following year.

/IANS