
MUMBAI: The rupee, which has been sliding since October and lost over 4%, plunged to 87.29 in opening trade on Monday.
The drop came after US President Donald Trump imposed 25% tariffs on Canada and Mexico and 10% on Chinese goods from Saturday. In retaliation, the three nations announced counter-tariffs on American goods.
Following this tariff wars, the dollar index, which measures the strength of the greenback against a basket of six major currencies, surged 1.35% to 109.83. These currencies are the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc. The Trump action has sent panic in Asian markets and Dalal Street was not immune to it. The benchmarks fell more than 1% each in morning trade and trading down 90 bps at 1200 hrs.
After tanking to 87.26 for the first time in opening trade, the rupee was trading at 87.15 at 1140 hours. The surge in the dollar index has created a panic in the market leading to a safe haven demand for the American unit, which is the world’s strongest and safest currency. However, the government bond yields remained steady at 6.67% but crude spiked in overseas markets with Brent crude, the global benchmark, rising towards USD 76/barrel after the Trump action fuelling supply concerns.
However, crude prices may face downward pressure as trade tensions escalate, potentially slowing global growth and weakening energy demand, said market participants.
“The fear of tariffs has come true. There is safe-haven demand,” a dealer at a state-owned bank said, adding more pain is on the way for the rupee as Trump is unlikely to leave Indian goods in his next round of punitive tariffs.
Another reason for this that the market is fearing that the rupee pain is likely to continue in the near term is that the Reserve Bank has reduced its intervention in the foreign exchange market—as visible from the latest forex data wherein it was reported a marginal rise in the reserves after losing for almost three months continuously.
“The optimism on the back of the budget has been compromised due to rise in US yields,” said a dealer at a state-owned bank. Anshul Chandak, head of treasury at RBL Bank, expects the rupee stay under pressure over the next 6–8 weeks.
The dollar’s strength has affected other Asian currencies as well, including the Chinese yuan. And since the yuan and rupee often move in the same direction, this decline has also put pressure on the Indian currency.
The tariffs imposed by Donald Trump have also fuelled worries of a full-scale trade war, with global brokerage firm Morgan Stanley saying that “the risk of our worst fears materialising has risen. Risks are skewed towards further escalation. Asia will be exposed on account of high trade orientation and seven economies run large trade surpluses with the US,” it added.