Indian Rupee Hits Record Low as US Tariffs and Trade Impasse Challenge India's Economic Outlook

The Indian rupee has reached an unprecedented low of 91.075 against the US dollar.

Mumbai/Singapore:

Among global currencies, India's rupee has suffered the most severe impact from US tariffs, with potential for further decline as investors withdraw from the market until a trade agreement with Washington materializes.

The rupee ranks among the worst performers globally in the current year, depreciating 6% against the dollar. This decline stems from an expanding trade deficit, severe 50% US tariffs, and significant investment outflows, pushing the currency to its record low of 91.075 per dollar.

According to Citi's analysis, when measured against a basket of currencies from trading partners, the real effective exchange rate stands at 96—the lowest in over a decade. This figure falls well below the ten-year average of 103, typically indicating that a rebound should follow.

However, money managers who have orchestrated a record $18 billion withdrawal from Indian equities this year suggest that current circumstances differ from historical patterns. Despite the rupee's apparent undervaluation, these investors believe sentiment is unlikely to improve rapidly.

"The market's patience is generally wearing thin," observed Vivek Rajpal, Asia macro strategist at investment advisory firm JB Drax Honore, noting that months of trade negotiations with the US have yet to produce an agreement or tariff relief.

While current conditions present a favorable entry point for Indian assets, market confidence requires assurance that these tariffs are temporary.

India and the US have engaged in negotiations throughout much of 2025, though India's Chief Economic Advisor indicated in a recent Bloomberg interview that an agreement might not be reached until March 2026.

Much of Asia has already secured agreements or at least temporary arrangements with the US, leaving India particularly vulnerable and forcing the rupee to absorb economic shocks.

A depreciating currency can mitigate tariff impacts by reducing export prices in dollar terms. However, with US levies at 50%, economists anticipate further rupee weakness will be necessary as an offset. Additional pressure comes from a relatively substantial trade deficit and ongoing portfolio outflows.

Without a trade agreement, these factors are unlikely to reverse soon. Reuters reporting suggests the central bank does not plan to intervene against fundamental market forces, reinforcing expectations of continued depreciation.

HSBC analysts have identified the sharp rupee depreciation as a significant risk to an otherwise promising outlook for Indian stocks, which they believe merit reconsideration due to improving valuations and economic fundamentals. They also view Indian markets as a potential hedge against artificial intelligence investment trends.

Other major financial institutions including Citi, Goldman Sachs, and JP Morgan have similarly upgraded their outlook on Indian equities in recent weeks, anticipating improved market performance in 2026 supported by interest rate cuts. Some even project a potential rupee recovery.

"The recent depreciation pace has been driven partly by geopolitical risk and its influence on current account expectations," explained Jean-Charles Sambor, head of emerging markets debt at TT International Asset Management, which oversees more than $5 billion in assets.

"We believe some of this risk may now be overstated," added Sambor, though he declined to reveal positioning details. Neither performance data nor fund flows indicate investors are actively accumulating rupee assets.

Indian equity markets, dominated by banking and IT outsourcing companies, have underperformed compared to peers in 2025. The benchmark Nifty 50 has gained approximately 10% year-to-date versus a 26% increase in the MSCI Emerging Market Index, hampered by a lack of clear artificial intelligence investment opportunities.

In dollar terms, the comparison is even less favorable, with MSCI's India equities index rising less than 2% this year against nearly 30% growth in MSCI's China index, which competes for foreign investment allocations.

Investors are also looking to China's experience during President Trump's first term as a potential indicator of the rupee's future trajectory.

Jitania Kandhari, deputy chief investment officer of the solutions and multi-asset group at Morgan Stanley Investment Management, compared the rupee's decline to the Chinese yuan's depreciation during previous US-China trade tensions under Trump, suggesting the rupee may need to continue weakening if tariffs persist.

The yuan declined approximately 12% between March 2018 and May 2020 amid escalating tariff announcements.

Her firm, which manages $1.8 trillion in client assets, maintains an overweight position on Indian stocks despite reducing holdings and finding value elsewhere.

"Depreciation of the rupee is necessary to improve the competitiveness of Indian exports," noted Kunjal Gala, head of global emerging markets at Federated Hermes, who has maintained an underweight position on India since early 2024.

"However, a depreciating rupee creates a dilemma for global investors who are indexed to the dollar."

(This article has not undergone editing by NDTV staff and is automatically generated from a syndicated source.)