US tariffs, stock outflows cloud Indian rupee outlook

The Indian rupee has tested successive record lows in recent weeks. The currency is down some 4.5% against the dollar this year, weighed down by almost $18bn of outflows from stocks and delays in finalising a trade deal with the US.

The withdrawals have worsened the strain on the rupee while the 50% US tariffs threaten exporters’ dollar inflows. At the same time, firm imports are keeping demand for the greenback elevated.

The rupee is currently Asia’s worst-performing currency of 2025. It is also on track for its largest annual decline since 2022 — the year Russia’s invasion of Ukraine sent oil prices soaring past $100 per barrel, dealing a major blow to India, which imports about 90% of its crude. At its strongest in early May, the rupee traded at 83.7538 per dollar. This was around the same time investors were betting India would be among the first to clinch a trade deal with the US.

But the tide turned in July, when US President Donald Trump announced plans to impose higher-than-anticipated tariffs and threatened to penalise India for purchasing Russian energy and weapons.

The levies dashed New Delhi’s hopes of preferential treatment over its Asian peers and the rupee suffered its worst monthly loss since 2022. In August, the US set tariffs on most Indian exports at 50% — the highest across Asia — which included a "secondary” 25% penalty tariff for India’s trade with Russia.

The rupee fell to a series of record lows, breaching 88 per dollar. A frantic foreign exodus from Indian equities — driven by US tariffs, high stock valuations and concerns about economic growth and tepid corporate earnings — has piled additional pressure on the rupee.

In a bid to stabilise the currency, the Reserve Bank of India has sold more than $32.8bn of foreign-currency assets since the end of July, according to Bloomberg Economics estimates.

Some analysts have suggested that the RBI’s defence of the rupee around 88.8 per US dollar is unsustainable amid wider trade deficits, weak portfolio inflows and a drawdown in foreign-exchange reserves.

According to Bloomberg Economics, the move was likely a tactical one — intended to preserve firepower for what could be a long and volatile stretch while the US and India negotiate a trade deal.

The rupee’s overall depreciation this year hasn’t come as a huge surprise; the currency has lost value every year since 2018. What has made its weakness stand out is that the US dollar itself has been slipping, while many emerging-market currencies — such as the Taiwan dollar, Malaysian ringgit, and Thai baht — have strengthened.

A weaker rupee makes Indian goods and services cheaper abroad, boosting export competitiveness. This helps to offset the tariff pressures facing exporters, as India seeks to expand its markets by signing trade deals with countries such as the UK. It’s also a boon for families of Indian workers abroad who send money home. India is the world’s largest recipient of remittances, with a record $137bn flowing into the country in 2024, according to the World Bank.

On the flip side, a weaker rupee makes imports more expensive, pushing up the cost of essential items such as oil, fertilisers and electronics, most of which India buys from overseas.

Analysts ramped up long bets on most Asian currencies on stronger growth prospects and weakness in the greenback, according to a Reuters poll in early December. At the same time, short positions on the Indian rupee surged to a 10-month high.

The rupee closed at 89.65 against the dollar yesterday, unchanged from its closing level in the previous session. India’s currency is now at a crucial juncture. Possible improvements in US-India trade ties and a lower tariff rate could ease pressure on the currency. But if that doesn’t eventuate, the RBI may be forced to support the rupee further.