Analysts see tariff war driving Rupee down to 90; closes @88.20

Mumbai: With tariff tensions intensifying between New Delhi and Washington, market economists warn the rupee could slip beyond the psychologically crucial 90-per-dollar mark unless the central bank steps in more forcefully. The latest escalation—a fresh 25% punitive levy on Indian exports, taking total tariffs to 50% from August 7—has sharpened uncertainty and kept the currency on the back foot.

Even a stronger-than-expected 7.8% GDP print for the June quarter failed to lift sentiment in the currency market. On Monday, the rupee set a second straight session of record intraday lows, touching 88.34 against the dollar, before trimming losses to finish marginally firmer by 1 paisa at 88.20.

Rupee hits record lows despite growth surprise

The rupee’s slide has quickened in recent weeks. On Friday, it briefly sank to a new trough of 88.31 intraday and settled at 88.21—its weakest close on record. That capped a bruising August, with the currency down 0.7% year-on-year for the month and 2.93% lower so far this year, making it the poorest performer among Asian peers in 2024 to date. It is also the steepest year-to-date decline for this calendar period in three years.

August marked the fourth consecutive month of weakness, which analysts largely attribute to tariff-driven uncertainty and the potential chilling effect on trade flows and investment. The previous all-time low of 87.95, set on February 10, was followed by a brief respite when the rupee clawed back ground and ended higher through March and April.

Monthly scorecard shows momentum turning

The trend across 2024 underscores a clear shift from early-year resilience:

• March: +2.23% (gain against the dollar)
• April: +1.13%
• May: -1.29%
• June: -0.20%
• July: -2.15%
• August: -0.7% year-on-year, with fresh record lows

While domestic growth has surprised to the upside, currency markets have focused on external risks: higher import costs if tariffs ripple through supply chains, potential export softness, and the likelihood of sustained dollar strength amid global risk aversion.

What could keep the rupee from 90?

Economists point to a handful of stabilizers that could help slow or reverse the slide:

• Central bank intervention: Spot and forward market operations can temper volatility and anchor expectations.
• Policy signaling: Clear communication on inflation, liquidity, and external sector management may reduce speculative pressure.
• Macro buffers: Healthy forex reserves and a manageable current account can reassure investors even in a risk-off environment.
• Easing tensions: Any de-escalation in tariff measures or clarity on exemptions would likely offer immediate relief.

Market implications

Should the rupee breach 90, importers may face higher costs, particularly for energy and critical inputs, potentially feeding into inflation. Exporters could see some competitiveness gains, but these may be offset if trade volumes are hampered by tariffs or if global demand softens.

For investors, prolonged currency weakness typically pressures foreign portfolio flows into debt and equities. Conversely, any decisive policy backstop or signs of a tariff truce could trigger a relief rally and short covering in the currency.

Near-term watchlist

• Official statements or measures from the central bank.
• Developments in US–India trade discussions and tariff timelines.
• Dollar index movements and US yield dynamics.
• Inflation prints and input cost trends in energy and commodities.
• Balance of payments data, including export orders and services receipts.

For now, the rupee remains under pressure, trading near record lows despite strong domestic growth data. With tariffs set higher and sentiment fragile, markets will look to policy cues and any thaw in trade tensions to determine whether 90 becomes a brief overshoot—or the next staging point.