Venugopal Garre flags structural weakness in capital flows, urges long-term reform push

In a conversation with ET Now, Venugopal Garre, MD, Bernstein said that recent pressure on the rupee is largely driven by external geopolitical factors rather than domestic economic mismanagement. He noted that such challenges are difficult to control in the near term and require careful policy handling to avoid destabilising sentiment.

He also warned that continued weakness in the currency could become inflationary and impact market confidence, particularly for a country running a current account deficit. According to him, while India has foreign exchange reserves, they may not be sufficient to fully absorb prolonged volatility if external pressures persist.

Capital outflows reflect global rotation and valuation gapOn foreign institutional investor (FII) flows, Garre said that weak inflows have been a persistent trend over the past few years. He attributed this partly to high domestic valuations and partly to stronger opportunities available in other global markets.He added that global investors are increasingly shifting capital toward technology-led economies and new growth themes. In his view, India needs to focus on emerging technologies and innovation-led sectors to improve job creation and attract more sustained capital inflows, both portfolio and foreign direct investment.

No near-term fix, structural approach requiredGarre emphasized that there is no immediate solution to current macro pressures, and that meaningful improvement will require medium- to long-term structural changes. He said India needs to move away from a reactive policy approach and adopt a more proactive economic strategy.He pointed to critical areas such as energy security and resource dependence, arguing that vulnerabilities in these sectors cannot be addressed only after crises emerge, but must be planned in advance with long-term execution.Inflation risks and demand pressure buildingAccording to Garre, the gradual shift of economic burden from the government to consumers is likely to impact spending patterns. As costs rise across the economy, household consumption could come under pressure, which may in turn affect corporate earnings.

He also highlighted additional risks from supply-side constraints, including energy availability and uncertainty around monsoon performance. He noted that such factors can add to inflationary pressure and further complicate the near-term economic outlook.

Structural rupee depreciation remains the base caseOn the long-term outlook for the rupee, Garre said structural depreciation is likely to continue unless India significantly improves its external earnings capacity. He pointed out that this has historically been the trend due to persistent flow constraints.

He stressed that improving manufacturing capability, expanding exports, and attracting long-term foreign capital are essential to stabilising the currency over time. Without these changes, he expects the rupee to continue depreciating gradually over the long term.

Long-term growth requires shift in economic thinkingGarre also urged a shift in mindset from short-term market performance to long-term economic development. He said policy decisions should not be guided only by near-term earnings impact, but by their long-term growth implications.

He added that even measures which may not immediately support corporate earnings could generate significantly higher returns over a longer horizon if they strengthen India’s economic structure.

AI, geopolitics and global competition shaping investor sentimentOn foreign investor sentiment, Garre said most global investors remain neutral to mildly underweight on India, rather than outright bearish. He explained that artificial intelligence-led opportunities elsewhere, along with geopolitical uncertainty, are influencing capital allocation decisions.

He added that global investors are comparing India’s valuation premium with cheaper markets offering stronger near-term growth visibility. However, he noted that India’s long-term growth story remains intact, with potential for strong returns once global capital cycles shift back.