India's Equities and Currency: Navigating Short-Term Volatility Amid Structural Strength in 2025

India's equity and currency markets in 2025 have been a study in contrasts. While foreign institutional investors (FPIs) have exhibited erratic behavior, domestic investors have emerged as a stabilizing force. Meanwhile, evolving swap dynamics and strategic policy interventions by the Reserve Bank of India (RBI) have shaped the rupee's trajectory. This analysis explores how short-term volatility coexists with long-term fundamentals in a market undergoing structural transformation.

Foreign Inflows and Domestic Investor Dominance

Foreign portfolio investors (FPIs) have injected ₹54,000 crore into India's primary markets in 2025 through IPOs, with October 2025 marking their second-highest monthly inflow of ₹10,096 crore, according to a Business Standard report. However, this activity has been uneven, with FPIs recording inflows in only five of the first 10 months. Meanwhile, domestic institutional investors (DIIs) have overtaken foreign ownership of Indian equities for the first time in 13 years, holding 18.26% of shares compared to FPIs' 16.71%, according to a Times of India report. This shift underscores the growing resilience of India's markets, driven by retail investor participation in mutual funds and sustained domestic demand. Between July and September 2025, DIIs added ₹2.21 lakh crore to equities, offsetting FPI outflows of ₹1.02 lakh crore, according to the Times of India report.

The divergence between FPI and DII behavior highlights a critical trend: while global macroeconomic uncertainties continue to drive foreign capital flows, India's domestic demand is increasingly insulating the market from external shocks.

Rupee Volatility and Swap Interventions

The Indian rupee has faced headwinds from fluctuating FII flows and global trade tensions. In September 2025, the one-day dollar/rupee swap rate surged to 1.21 paisa amid quarter-end liquidity pressures, pushing implied rupee interest rates to nearly 9%-far above the RBI's policy rate of 5.60%, according to a Reuters report. Such spikes reflect tight liquidity conditions and underscore the rupee's vulnerability to short-term shocks.

To counteract this, the RBI has resumed foreign exchange swaps, injecting liquidity into the banking system and stabilizing the currency, according to a Business Times report. These interventions, coupled with state-run banks' dollar sales, have cushioned the rupee's decline, according to a MarketScreener report. However, the central bank's upcoming policy decisions will be pivotal in determining whether stability is sustained or further volatility emerges.

Short-Term Volatility vs. Long-Term Fundamentals

While global economic trends and FII flows drive short-term volatility, India's long-term fundamentals remain robust. Vikas Khemani of Carnelian Asset Management notes that structural growth in sectors like banking, manufacturing, and pharmaceuticals is accelerating, supported by global realignments such as the "China plus one" strategy, according to an Economic Times report. The IT sector, though exposed to global shifts, benefits from digital transformation and cost rationalization trends, according to the Economic Times report.

Moreover, India's push to internationalize the rupee through currency swap agreements with key trade partners aims to reduce reliance on the U.S. dollar and insulate the economy from external shocks, according to a Bloomberg report. While the rupee's global payment share remains low, these efforts could enhance its role in cross-border transactions over time.

Strategic Outlook

The interplay between short-term volatility and long-term fundamentals suggests a cautiously optimistic outlook. Foreign inflows into primary markets and domestic investor confidence signal underlying strength, even as global macroeconomic risks persist. The RBI's proactive use of swap interventions and liquidity management tools provides a buffer against immediate shocks.

However, challenges remain. The delayed U.S.-India trade deal and uncertainty around U.S. tariffs continue to weigh on sentiment, according to a Reuters report. For investors, the key lies in balancing exposure to India's growth story with hedging against currency and liquidity risks.