US midterms could bring foreign investors back to India, support rupee as dollar weakens: Report

The US midterm election results could offer a modest boost to Indian financial markets, potentially attracting foreign portfolio investors (FPIs) and supporting the rupee as the dollar weakens, according to a report by CareEdge Ratings. However, the rating agency cautioned that global market volatility, geopolitical tensions and uncertainty surrounding US economic policies could limit the gains.

In its November 4 report titled Washington's Political Reset: What the US Midterm Elections Mean for India?, CareEdge said the Democratic takeover of both chambers of the US Congress could reshape investor sentiment and encourage a shift in global capital allocations.

The agency assessed the overall impact on India's rupee and foreign portfolio flows as "mildly positive", while maintaining a broadly neutral outlook on trade, tariffs and strategic relations.

Why could foreign investors return to India?

According to CareEdge, early market reactions following the US midterm results indicated some risk aversion, with US Treasury yields easing marginally as investors sought safer assets.

The US dollar index also softened, creating a potentially favourable environment for emerging-market currencies, including the Indian rupee.

A weaker dollar generally improves the relative attractiveness of emerging-market assets and can encourage foreign investors to increase their exposure to markets such as India.

CareEdge noted that initial FPI inflows in November provided some optimism about a possible improvement in overseas investment sentiment.

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US AI stocks could influence Indian markets

Another factor that could benefit India is a potential shift in global investment away from expensive US technology and artificial intelligence stocks.

The report highlighted that Democratic lawmakers have traditionally favoured stronger oversight of technology companies, tighter data privacy safeguards and increased scrutiny of AI infrastructure.

Concerns surrounding electricity consumption, water usage and rising utility costs associated with data centres could also attract regulatory attention.

Any tightening of regulations or increase in compliance costs could weigh on US technology valuations, potentially encouraging investors to diversify into other markets, including India.

However, CareEdge warned that a sharp correction in AI stocks, rather than an orderly sectoral rotation, could trigger recession fears and adversely affect global markets.

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What does this mean for the rupee?

The agency expects a softer dollar to provide some support to the Indian currency.

Improved foreign portfolio inflows could also strengthen demand for rupee-denominated assets, helping offset external pressures.

However, crude oil prices remain a major concern. Brent crude was trading near $104 per barrel at the time of the report, with geopolitical tensions around the Strait of Hormuz threatening further volatility.

Higher oil prices could increase India's import bill, widen the current account deficit and put renewed pressure on the rupee.

Risks remain despite political reset

CareEdge also flagged the possibility of renewed US fiscal concerns as another debt-ceiling confrontation approaches in mid-2027.

While Democratic control of Congress could increase scrutiny of President Donald Trump's policies, the White House retains significant executive powers.

Overall, CareEdge expects limited but positive implications for India's currency and foreign investment flows, although sustained gains will depend on global risk appetite, oil prices and developments in US financial markets.

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