The dollar cycle holds the key to India’s next bull run

Every conversation about Indian markets now begins with the same weary observation: two flat years. The commentary has settled into comfortable pessimism. But beyond the all-important earnings, some key variables for Indian equities are not set in Mumbai. They are first and foremost the dollar cycle, along with other macro numbers such as crude oil and the US long end yield. The sentiment around Anthropic and OpenAI IPOs will also be key over the next year.

On the OECD’s measure the dollar sits around the 95th percentile of the last 25 years, a window that spans one complete cycle, peak (February 2002) to peak (January 2025). Against India the reading is even starker: the ratio of India to US real exchange rates has been lowest at least since 2003, if not earlier. A dollar goes almost five times further in India in terms of buying goods and services than in the US. The Indian current account deficit has been benign for a few years, and ex-gold is in a surplus. By all fundamental metrics, the rupee seems to be undervalued and could likely appreciate in the coming years now that the dollar cycle seems to have peaked in 2025.

When the dollar weakens, it creates growth for the rest of the world in the real economy and even more so in the financial economy. The 1970s favoured Europe; the post-Plaza decade benefitted Japan; 2002–2007 was the turn of BRICS and EMs led by China. In the last full down-leg, February 2002 to July 2011, the rupee strengthened from 48.6 to 39.4, Sensex earnings compounded by approximately 16% a year against around 10% since, and broad Indian equities beat the S&P 500 by a cumulative four times in like for like dollar terms from January 2000 to January 2010.

Over the full dollar cycle (2002-25), the Indian market outperformed the US and all major markets in hard dollar terms. The dollar peaked in January 2025 and has since given back less than 5%; this down-cycle has just begun. It is also worth remembering that reserve currency devaluations are often negotiated rather than discovered, as demonstrated by the 1985 Plaza Accord. This one needs no communiqué: Washington wants a cheaper dollar and Beijing, for once, needs a dearer renminbi as it seeks to increase consumption and ward off fresh tariffs from not just America but Europe and the rest of Asia as well. Asia suppressing currencies to sell to the American consumer and parking the surplus in Treasuries stops working once China and India are themselves the marginal consumers by the 2030s and their bond markets can hold their own savings.

The domestic India story seems to be getting better. June 2026 profits grew in the high teens ex-OMCs. Valuations are near long term averages, especially for large-caps. The Indian bond market has absorbed the global long end vigilante strike better than most countries. The India-US inflation gap, near 300 basis points for a generation, has run at about 150 since 2016. The room is in the long end, reinforced by bond-index inclusion and record foreign buying of government securities after the June tax cuts.

India’s equity valuation premium over emerging markets (plus 52% on average since 2008) is down to about 11, the lowest of the sample. Against its own bonds, the large-caps are at record low

valuation levels in decades. And the banks are the heart of it: Nifty Bank sits near the sixth percentile of its price-to-book history, and India’s best private banks trade below JP Morgan on book, at comparable returns on equity, in an economy growing nominally three times as fast. The top 10 banks of India together have a market cap half of JP Morgan.

By FY28, Indian earnings acceleration could be much more visible and the dollar cycle downturn more along the way. The AI trade is reaching a denouement with Anthropic IPO and OpenAI price cuts as well as new model slowdown. Even a slight slowdown there could lead to a rekindling of interest in India, especially as the rupee now has a clear floor: due to long-term fundamentals, mid-term cycle and short-term FCNR proceeds. India converts nominal growth into earnings over long periods and once that growth is also visible in dollars, the fact that India is the only major double-digit nominal growth economy in the world will matter much more than ever before.

As America tries to strengthen the Japanese yen and cap its long end yields through treasury interventions, the entire Asian currency complex is likely to rise from its current cheap fundamentals. As a large domestically focused democracy, Indias rise in such a cycle could be the most notable.

(The writer is chief equity strategist, Ionic Asset. Views are personal.)