Navigating a Weakening Indian Rupee and Trade Tensions

Siddharth Roy

(siddharth001.roy@gmail.com)

Recently, the global economy has become quite unstable and is fluctuating,  impacting the rupee on a large scale. We have seen that the Indian rupee has gone to an all-time low compared to the US dollar; i.e., one dollar equals Rs 88. It is the first time that the Indian rupee has plunged so low; it has never depreciated below Rs 88. If you check the intraday trade graph, the rupee slipped as far as Rs 88.29 per USD before recovering slightly after intervention by the Reserve Bank of India. The closing rate settled near Rs 88.19, the weakest ever; earlier reports of the rupee being Rs 87.97 per USD reflected momentary snapshots in different training segments before the steeper fall pushed it past Rs 88. It is the first time in history that the rupee broke the Rs 88 psychological threshold.

The US under President Donald Trump has recently tried to pressurise India to cut off trade relations with Russia, which they think is funding Russia’s war against Ukraine. In this context, the Trump administration of the US has recently doubled the tariffs on Indian goods to 50%. Already the tariffs placed by the US government were high, i.e., 25%, but now they have been doubled. Now, India has become a country with the highest tariff placed by the U.S. Although the US court has declared Trump’s high tariffs illegal, the tariffs still haven’t been withdrawn. Now the matter will go to the Supreme Court of the US, and finally a judgement will be passed, which might rationalise the undue tariffs placed by the Trump administration. The US’s high tariffs directly impact India’s export-oriented sectors, such as textiles and garments, gems and jewellery, pharmaceuticals, automobile components, and other such sectors. There is a sense of fear that has developed in the minds of the investors that such punitive tariffs will reduce India’s export competitiveness in the US market. If exports fall, then the overall foreign exchange inflow will come down, which will result in a smaller number of US dollars coming to India. If a smaller number of US dollars comes to India, then this will lower the availability of dollars in the Indian market, resulting in the strengthening of US dollars compared to Indian rupees. This will depreciate the rupee further and will hurt India’s growth outlook. Due to this fear-laden mindset of the investors, the foreign portfolio investors have been pulling out their capital from the market, intensifying pressure on the Indian rupee, weakening it further. This has been evident from analysing the stock market, where we can see that the BSE SENSEX has slumped more than 2% in the last few days and the market is bearish. Foreign investors have already withdrawn $9.7 billion from Indian equities in 2025, and the recent tariff escalation has accelerated this flight of capital. The Indian rupee, after excessive depreciation, is now the worst-performing major Asian currency in the year 2025, having lost about 3% in the year to date. The global investors, or the foreign portfolio investors (FPI), after withdrawing from the Indian market, are flocking to the US to invest in their market, as they consider the US dollar a safe haven, and this will strengthen the greenback and worsen the rupee’s slide. Moreover, this rupee depreciation has impacted the psychology of the traders. Once the rupee crossed the Rs 88 mark per USD, it triggered panic selling, as traders began to speculate that the Indian rupee will depreciate further to Rs 89-90 per USD in the coming days.

After this fiasco, the role of the Reserve Bank of India becomes very important to ensure the stability of the rupee compared to other currencies, especially against the US dollar. Currently, we have a forex reserve of around $650 billion, which acts as a buffer to the depreciation of the Indian rupee, taking place currently. The RBI has intervened, taking the necessary steps to stabilise the Indian currency by selling US dollars from its forex reserve to limit the rupee’s fall. What exactly happens is that when RBI sells US dollars from its reserves, it increases the supply of USD in the Indian market, resulting in depreciation of the currency compared to Indian currency. Moreover, to increase the strength of the Indian currency, the RBI sucks up excess liquidity from the Indian market so that there is a smaller amount of Indian currency flooding the market compared to USD, strengthening or appreciating the Indian rupee. Market analysts have opined that the RBI’s intervention was measured and not aggressive, suggesting the central bank does not want to burn through reserves too quickly. The RBI’s goal seems to be smoothing the volatility of the Indian currency and not defending a fixed level.

There might be various economic implications of the rupee weakening against the US dollar. Looking at the short-term effects, imports will become costlier than before. India relies heavily on imports of crude oil, electronics, fertilisers, and machinery. With the rupee weaker right now, the cost of these imports will rise, worsening the current account deficit (CAD). Since the imports will become costly, there will be inflationary pressures building up. Higher import costs, especially fuel, will push up inflation. This burden of inflation and high costs could fall on households via higher petrol/diesel prices and also on key industries via increased input costs. Continued volatility will impact the confidence of the foreign investors, leading to capital flight, and also higher risk premiums would have to be paid by Indian traders on their imports, increasing their borrowing costs.

Looking at the medium- to long-term effects, there will be a high impact on India’s export competitiveness. A weaker rupee compared to the USD should in theory make Indian exports more competitive, but now with the high US tariffs at play, this advantage is negated. The export sectors are facing a double blow with a weaker global demand and higher US duties. Moreover, the depreciating currency and the tariff shock, according to some analysts, could shave off 0.6% to 0.8% from India’s GDP growth in FY26. These developments risk slowing India’s growth momentum below already set government targets. The corporate balance sheets will also be impacted. The companies with dollar-denominated debt will face higher repayment costs, adding stress to sectors like infrastructure and aviation. Looking from a global and geopolitical angle, the high tariffs are seen as a part of Trump’s protectionist trade agenda, targeting India, much like China earlier. India’s attempts to balance relations with the US, Japan, Russia, and China are now under strain. This currency fall exposes India’s vulnerability to external shocks, despite strong micro fundamentals like high forex reserves and GDP growth rate.

Rs 89 compared to one USD is the next key psychological level; if breached, markets could see panic reactions, and the RBI will continue its tactical interventions but is unlikely to set a hard cap. What the government can do is to provide incentives supporting exporters. Future diplomatic talks with the US administration can be done to ease the tariff tensions, although earlier diplomatic talks failed to rationalise the high US tariffs. The government also needs to take measures to attract foreign investments like FDI by easing the FDI norms further. India is currently exploring the Eurasian market to find an alternative for the Indian exporters. Our Prime Minister, after seven years, has visited China to take part in the Shanghai Cooperation Organisation (SCO) summit to rekindle and strengthen ties with China and other Asian countries, which seems to be a success. India is also planning to sign an FTA with the Eurasian Economic Union (EAEU) and strengthen ties with Russia so that the Indian exporters can export their goods to Russia and the other EAEU nations. India is the leader of the global South, and these actions taken by the government are in line with India becoming an Atman Nirbhar and Viksit Bharat.