MUMBAI: The deepening chill between New Delhi and Washington that began with the US slapping an additional 25% punitive tariffs on our exports from last week, taking the total to 50% from August 7, may force the rupee to plumb deeper and plunge past the psychologically key 90-mark, unless the central bank props it up, warn economists.
Despite the broader market getting a leg-up from the unexpectedly high 7.8% GDP print in the June quarter, the rupee hit a record intraday low for the second straight session Monday but pared the losses to end flat, closing 1 paisa up at 88.20 against the greenback after falling to a new record low of 88.34.
The rupee fell 0.7% in August on-year plunging to 88.21 last Friday its lowest on record (after hitting an intraday low of 88.31) and is weaker by 2.93%, making it the worst performer among Asian peers so far this year, and this is the biggest year-to-date fall in last three years for this period. August saw the fourth consecutive month of weakness, which experts say is primarily due to the tariff-related uncertainty. The previous low was 87.95 on February 10 and since the unit clawed back and had closed in the green in March and April.
The rupee lost 2.15% in July, 0.20% in June, 1.29% in May, after having gained 1.13% in April and 2.23% in March against the greenback.
The Reserve Bank though doesn’t have an official level for the rupee enters the spot market whenever there is too much volatility or to prevent any sharp depreciation.
As the rupee has been under pressure for long now, the forex reserves fell by $5 billion to $691 billion as of August 22, as the RBI sold dollars to support it. A month ago the reserves were close to its record high of $704.88 billion it had peaked in the week to September 27, 2024 and since then had gone down to under $600 as the rupee were on wild ride southwards.
Apart from the tariff jitters, experts also warn that the rupee could remain under pressure weighed down by the massive selloff by foreign portfolio investors, which touched close to Rs 35,000 crore in August, the highest in six months and nearly double of their take-outs in July. So far this year, foreign portfolio investors have sold nearly Rs 1.4 trillion in domestic equities.
Another reason for the weakness in the rising bonds yields which is weighing on sentiment. Yields on the 10-year benchmark bond rose to nearly 6.70% before easing to 6.59% on Monday.
Bank of Baroda economist Aditi Gupta sees the rupee plunging to the 90-mark and the pressure on the domestic currency is unlikely to ease in the near-term. However, she expects the RBI is likely to defend the currency through its intervention. A key psychological level will be the 90 mark.
Anil Kumar Bhansali of Finrex Treasury Advisors expects that the RBI may allow more depreciation to maintain competitiveness against peers facing lower tariffs so that our exporters hit hard by the punitive tariffs may not suffer much.
"Exporters who sold at 87.80 may now wait for further declines, while importers are advised to hedge on major dips and cover near-term payables on smaller ones," he said.
“The currency has bucked the regional trend to weaken on the back of wider tariff differential vs peers, and portfolio outflows, particularly from the equity markets,” Radhika Rao, senior economist at DBS Bank said in a note.
“The RBI may prefer to let the rupee reflect external pressures more freely, rather than using reserves to defend a particular level. The rationale could be that a weaker rupee, to some extent, helps offset the tariff-induced export strain by making our goods relatively more competitive abroad. At the same time, external headwinds from tariffs and persistent foreign outflows are also significant, and resisting them entirely could prove costly and ineffective,” according to Amit Pabari of CR Forex Advisors.
The rupee weakness has coincided with lacklustre foreign portfolio investment inflows. Despite the strong macroeconomic backdrop and a surprisingly high Q1 growth of 7.8% that managed to beat expectations, global investors have been cautious.
“Foreign inflows, particularly by foreign funds, have remained on a weaker side this year. This is because of the elevated tariff war, which is creating a high degree of uncertainty in the markets and impacting investor sentiments,” BoB’s Gupta said.
“The key negative factor for the rupee is the US tariffs, which add structural pressure on the trade balance, and the rise in gold prices, which further weigh on the current account. However, there are also supportive elements that can prevent excessive depreciation,” Pabari notes.