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The Indian rupee tumbled to a new record low against the dollar on Friday, dragged down by growing concerns over a 50 per cent tariff on goods exported to the US that came into effect this week.
The Indian currency fell as much as 0.8 per cent on the day to 88.31 rupees to the dollar on the day, breaching the 88 mark for the first time in its history.
The fall came before data late on Friday showed GDP for the April to June quarter grew 7.8 per cent year on year, beating expectations. However, punishing levies announced by US President Donald Trump, who blames the country’s purchases of Russian oil for funding Moscow’s war in Ukraine, are widely expected to damp future growth.
The weakening rupee is “definitely about the tariffs”, said Michael Wan, senior currency analyst at MUFG, calling the 50 per cent rate “a meaningful negative for India”.
The Reserve Bank of India sold dollars on Friday to support the rupee, according to two traders with knowledge of its actions, although it was not as aggressive as it has been in the past. The RBI did not respond to a request for comment.
The rupee has fallen 3 per cent against the dollar this year, making it Asia’s worst-performing major currency. Analysts say the RBI may allow it to depreciate further to help exporters reeling under the steep tariff threats.
Wan said the tariffs will hit foreign inflows into Indian stocks and bonds, dragging the rupee lower. While the central bank has historically been willing to intervene to support the currency, “it seems like [the] RBI is less active in intervening in the FX market to cap rupee weakness, having been more active around the 87.90 level previously”, he added.
The RBI can allow some rupee weakness, he said, to help export competitiveness and offset the effect of the tariffs.
One of the traders aware of the RBI’s sales said that while in the past the central bank had defended the rupee against the 88-per-dollar level, it was “missing” earlier in the day, allowing that barrier to be breached. It intervened later, but without the past “aggression”. He said that “supply volume required to support the rupee was missing”.
The punitive tariffs are expected to have a significant impact on sectors crucial for India’s labour-intensive small and medium-sized companies in textiles, gems, jewellery and shrimp, and hit more than half of the country’s over $85bn annual exports to the US.
The tariffs could knock off up to 1 percentage point from India’s GDP growth, according to Standard Chartered.
However, the stronger than expected second-quarter growth “will provide a major cushion to any downside that the economy could witness due to the effect of higher tariff imposition by the US”, said Madan Sabnavis, chief economist at Bank of Baroda.
Sakshi Gupta, principal economist at HDFC Bank, said a new range for the rupee between 88 and 89 per dollar has emerged. She said she expected the RBI to prevent any “panic selling”, but “the currency is expected to trend lower for the time being”.
Trump slapped India with a 25 per cent “reciprocal” tariff last month after the two sides failed to reach a trade deal, as India resisted opening up the agriculture and dairy sectors that provide livelihood to hundreds of millions of Indians, and over which Prime Minister Narendra Modi has said he will “never compromise”.
With tariffs of 50 per cent, many Indian goods are seen as losing their competitive edge to other regional producers, all of whom are hit with much lower tariffs. However, India’s two other major exports — electronics, including Apple products, and pharmaceuticals — are exempt, as they are covered by sector-specific tariffs.
Though India is largely a domestically focused economy, RBI governor Sanjay Malhotra said at an event earlier this week, before the increased tariffs were enforced, that the central bank would provide whatever support was needed “for the growth of the economy and including those of the sectors which are impacted more”.
Even before the additional tariffs came into force, foreign investors had pulled out more than $13bn this year from Indian equity markets, putting further pressure on the rupee.
