On Friday, the Indian rupee sank to unprecedented lows, surpassing the 88-per-dollar threshold for the first time, as concerns grew over US tariffs impacting growth and portfolio inflows.
This week, Washington implemented an extra 25% tariff on Indian imports, raising the total duties faced by India to 50%.
The rupee closed at 88.1950 (approximately Dh24.04) per US dollar, a 0.65% decline for the day, marking its steepest one-day drop in nearly three months. It hit a record low of 88.3075 (about Dh24.06) during the session, possibly leading to intervention by the Reserve Bank of India.
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The rupee dropped 0.68% in August, mainly due to Friday’s decline, extending its losing trend to four consecutive months.
“The US tariffs are expected to exacerbate India’s balance of payment challenges, maintain weak financial flows, and increase the trade deficit,” commented Dhiraj Nim, FX strategist at ANZ Bank.
“My outlook remains bearish on the rupee, with dollar/rupee likely to climb further despite a generally weaker dollar.”
Economists suggest that if the US tariffs persist for a year, they could reduce India’s GDP growth by 60-80 basis points, potentially intensifying pressure on an already decelerating economy.
The central bank of India forecasts a 6.5% economic growth for the current fiscal year ending March 31.
Exports to the US represent 2.2% of India’s GDP, but a significant slowdown in labor-intensive sectors such as textiles and jewelry could result in job losses and amplify the economic impact, according to economists.
At a time when foreign portfolio flows are weak, the tariffs could expand India’s trade deficit, further straining the balance of payments.
Foreign portfolio investors have withdrawn $9.7 billion from Indian debt and equities this year. Over the two sessions following the announcement of additional US tariffs, over $1 billion was pulled from Indian equities.
This week, Indian equities saw their sharpest drop since March.
The rupee’s depreciation this week — including a new record low against the yuan on Friday — might partially mitigate the effect of increased US tariffs.
The rupee has struggled against the dollar, despite the dollar’s broad weakness.
“This isn’t necessarily negative, as the trade-weighted real effective exchange rate is now at its lowest in two years, potentially boosting competitiveness,” noted analysts at JP Morgan.
