The Indian rupee is likely to stay under pressure, weighed down by tariff-related headwinds, raising concerns of the psychologically important 90/USD mark getting tested in coming months, money market experts have said.
To defend against any sharp depreciation, the Reserve Bank of India (RBI) is likely to intervene in the spot market, economists have told Moneycontrol.
According to Aditi Gupta, Economist at Bank of Baroda, the pressure on the domestic currency is unlikely to ease in the near term. “We can expect the pressure on the rupee to persist in the coming days. However, the RBI is likely to defend the currency through its intervention. A key psychological level will be the 90/USD mark.”
According to Bloomberg data, the Indian rupee has depreciated by around 0.7 percent in August, and on a year-to-date basis, it is down 2.94 percent against the US dollar. This is the biggest year-to-date fall in last three years for this period.
The depreciation seen in August was the fourth month of weakness for the local currency against the US dollar, which experts have attributed mostly to the tariff uncertainty. The domestic currency depreciated 2.15 percent in July, 0.20 percent in June, 1.29 percent in May, after having appreciated by 1.13 percent in April against the greenback.
On August 29, the Indian rupee ended record low outflows from equity markets, Trump’s tariff pressure on India, month end oil demand and Rupee-Yuan dynamics.
“The currency has bucked the regional trend to weaken on the back of wider tariff differential vs peers, and portfolio outflows, particularly from the equity markets,” said Radhika Rao, Executive Director and Senior Economist at DBS Bank.
Currency experts now believe the central bank may allow to some depreciation, in order to maintain export competitiveness.
“The central bank may prefer to let the rupee reflect external pressures more freely, rather than using reserves to defend a particular level. The rationale could be that a weaker rupee, to some extent, helps offset the tariff-induced export strain by making Indian goods relatively more competitive abroad. At the same time, external headwinds from tariffs and persistent foreign outflows are significant, and resisting them entirely could prove costly and ineffective,” said Amit Pabari, Managing Director at CR Forex Advisors.
The Rupee’s weakness has coincided with lacklustre foreign portfolio investment (FPI) inflows. Despite India’s strong macroeconomic backdrop and Q1 GDP growth rate that managed to beat expectations, global investors have been cautious.
“Foreign inflows into India, particularly by FPIs, have remained on a weaker side this year. Even so, we have not seen a substantial pickup in FPI inflows. This is because of the elevated tariff applied by the US on India’s exports, which is creating a high degree of uncertainty in the markets and impacting investor sentiments,” BoB’s Aditi Gupta said.
Tariff-related uncertainties have compounded the external environment, adding to volatility across global financial markets. Economists highlight that foreign investors are factoring in not only the high US tariff on India but also the path of US interest rates while determining allocations.
Experts see the rupee’s movement in coming months hinging on the delicate balance between external headwinds and domestic policy support. While the RBI is expected to play a stabilising role, global dynamics, especially the trajectory of US interest rates, portfolio flows, and tariff negotiations will be critical in determining whether the rupee manages to hold below the 90 against the US dollar threshold or breaches it.
“The key negative factor for the rupee remains the US tariffs, which add structural pressure on the trade balance, and the rise in gold prices, which further weigh on the current account. However, there are also supportive elements that could prevent excessive depreciation,” Amit Pabari added.
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