Trump Tariff Shock Poised To Deepen Rupee’s Underperformance

Higher tariffs may shave off about 30 basis points from the gross domestic product growth, according to Barclays.

Markets will now look to the Reserve Bank of India’s policy meeting on Aug. 6 for its rate moves and cues for the rupee. The RBI delivered a surprise 50-basis-point rate cut in its last meeting and signaled a higher threshold for future easing.

While the near-record foreign-exchange reserves give the RBI room to intervene, any action to curb rupee losses is likely to be measured, as “tariff uncertainty limits the RBI’s motivation to aggressively push” rupee higher against the dollar, Citigroup economists led by Samiran Chakraborty wrote in a note.

The rupee fell 1.2% last week to 87.5275 per dollar on Friday, marking its biggest weekly drop since December 2022.

Still, not all analysts are bearish. Hopes linger that a delayed trade deal with Washington may still materialize, with India reportedly weighing concessions, including boosting imports from the US, while holding off on retaliatory measures.

“The key for markets and our rupee forecast is whether a trade deal is delayed but not denied,” said Michael Wan, senior currency analyst at MUFG Bank Ltd. He sees the rupee at 87 per dollar by end-December, compared with his earlier forecast of 84.50.

For now, headwinds for the rupee from sluggish foreign inflows remain.

“The bond market may not see significant inflows, as the RBI has indicated little room for further cuts,” said Chandresh Jain, EM Asia rates and FX markets strategist at BNP Paribas SA. Equities also look stretched, with high valuations and slowing economic growth, he said.