Foreign investors who rode India’s stock rally in 2024 faced a harsh math lesson: currency risk can wipe away equity gains. An investor buying Indian equities at the start of 2024 and exiting in early 2025 would have earned a dollar return of about 0.61%, even as the Sensex rose. Over the same stretch, a simple alternative stood tall. The US 10-year Treasury yield was above 4.5% for much of 2024 and stands at 4.08% as of February 2026. The comparison has sharpened the debate on whether India’s promise offsets currency and valuation risk for global funds.
An FII who invested in Indian equities at the start of 2024 and exited in early 2025 with a modest Sensex gain would have earned barely 0.61% in dollar terms after rupee depreciation — against US 10-year bond yields that were above 4.5% through much of 2024, and remain at 4.08% as of February 2026.
Why Currency Moves Matter
For foreign institutional investors, returns live and die in their home currency. A rising index helps, but a weakening rupee can offset those gains when converted back to dollars. The period from early 2024 to early 2025 offered a clean case study. The Sensex rose modestly. The rupee slipped. The end result in dollar terms was close to flat.
This is not a new story in emerging markets. Equity rallies can be strong, but currency swings often set the final score. When domestic inflation is sticky or interest rate gaps widen with the US, pressure on local currencies can increase. That makes entry and exit timing as important as stock selection for global funds.
Higher US Yields Changed the Math
The hurdle rate for risk rose in 2024. With the Federal Reserve keeping rates high, the 10-year Treasury spent much of the year above 4.5%. For many allocators, that yield offered a low-volatility alternative to equities and foreign exchange risk. Even today, the 10-year sits at 4.08%, a stout anchor for portfolios that prize income and capital safety.
The contrast is stark. A roughly 0.61% dollar return on Indian equities over the period in question pales against risk-free US yields. It does not mean India underperformed in local terms. It means the currency did the heavy lifting, in the wrong direction, for dollar-based investors.
Valuation, Growth, and the Case for India
Bulls argue India’s growth story still outweighs the currency drag. Corporate earnings have improved across banks, consumer firms, and industrials. Policy reforms, infrastructure spending, and a busy investment pipeline continue to support sentiment. For long-horizon funds, the pitch is simple: compounding earnings can outrun currency weakness over time.
Skeptics see tighter math. Valuations on headline indices sit at a premium to many peers. When the starting price is rich and US yields are high, the margin for error narrows. A soft rupee can turn a decent local gain into a meager dollar result. That pushes some global funds to hedge currency risk or prefer export-heavy names with natural dollar revenues.
What the Numbers Say
- Local equity gain: modest Sensex rise from early 2024 to early 2025.
- Dollar return after FX: about 0.61%.
- US 10-year yield: above 4.5% for much of 2024; 4.08% as of February 2026.
The message is clear: a few percentage points of currency weakness can erase a year’s worth of stock gains if the advance is modest.
What Could Shift the Balance in 2026
Several forces could improve dollar returns from Indian equities. A firmer rupee, driven by stable inflation, narrower rate gaps with the US, or strong services exports, would help. Faster earnings growth from banks, capital goods, and autos could also widen the equity premium over bonds.
On the other hand, if US yields stay near 4% and the rupee stays soft, global allocators may demand cheaper entry points or hedged exposure. Hedging adds cost, but it can stabilize outcomes when currency trends are unfavorable.
The takeaway is blunt but useful. For foreign investors, currency is a core part of the return, not a footnote. The past year showed how a positive local tape can translate into flat dollar results when the rupee slips and Treasuries pay 4% or more. The next phase will hinge on earnings momentum, the path of US rates, and the rupee’s direction. If two of those three line up, India’s case gets stronger. If not, the bond market keeps the upper hand.
