While a weaker rupee typically enhances export competitiveness, its 5% depreciation this year to become Asia’s worst-performing currency is proving to be a weak cushion against the 50% punitive tariffs that the US president unleashed on key Indian goods in August.
The damage extends across crucial sectors, including textiles, coal, energy, aviation, electronics, and chemicals. Labour-intensive export industries like apparel, which typically gain from a weak currency, are losing ground to rivals such as Bangladesh and Vietnam.
Ajay Sahai, director general and chief executive officer of the Federation of Indian Export Organisations (Fieo), said the benefit from the rupee’s 5% drop is entirely overshadowed by the 50% US levies. The limited benefit from a cheaper rupee is confined to exporters shipping to non-US destinations, effectively shutting out India’s largest trading partner.
“If there are no orders (from the US), how will any depreciation in the rupee help?” Sahai questioned.
After touching the 90-mark on Wednesday, the domestic currency hit an intraday low of 90.42 on Thursday, before pulling back to close at 89.98; however, the currency is widely expected to remain under pressure until a US-India Bilateral Trade Agreement provides clarity. The uncertainty follows a year when merchandise exports to the US hit a record $86.51 billion in FY25, solidifying its role as India’s premier trading partner.
The chief executive of a major Indian apparel exporter lamented the minimal impact: “I’m so much under water that this benefit is like raising me from 10 feet under water to 9 feet. I’m still submerged.”
The rupee’s volatility is being attributed to a mix of less aggressive Reserve Bank of India (RBI) intervention, a pending trade deal with the US, and significant foreign capital outflows. Overseas investors have net sold $17.9 billion in Indian equities this year, a sharp reversal from the $124 million net purchases recorded in the previous year, according to National Securities Depository Ltd data.
For sectors with high import reliance, like electronics and chemicals, any advantage from a depreciating rupee is largely negated by the spike in raw material costs. Even the pharmaceutical industry, which has escaped US sanctions, is seeing benefits diminished by the higher cost of importing active pharmaceutical ingredients, Fieo’s Sahai noted.
Adding to the competitive pressures, rival currencies have also weakened. Bloomberg data shows the Philippine peso, Indonesian rupiah, and Vietnamese dong depreciating 1.96%, 3.29%, and 3.37% respectively this year.
“We cannot compete with a 50% tariff with a 5% depreciation in currency,” said Gaura Sengupta, chief economist at IDFC First Bank. She argues that while depreciation provides a cushion, it cannot bridge the wide gap, and India cannot risk a ‘runaway’ currency collapse that would accelerate capital flight.
The weak currency is also inflating hedging costs. The dollar-rupee one-year forward premium, a key indicator of hedging expenses, has risen 30 basis points since the end of November, reflecting the increasing cost companies must pay to lock in a future exchange rate.
Sengupta suggested the RBI is allowing a slightly greater depreciation due to its limited capacity to intervene heavily by selling dollars, which absorbs rupee liquidity from the banking system.
“On one hand, RBI is there in the market to ensure the currency does not have runway depreciation. On the other hand, it is trying to ensure that the drain on banking system liquidity is as little as possible,” Sengupta explained.
Treasury officials suggest a policy shift. V.R.C. Reddy, head of treasury at Karur Vysya Bank, said: “A weaker rupee is no longer viewed as a macro risk by itself as long as inflation expectations remain anchored and external balances are manageable.” He added the RBI appears focused on smoothing volatility rather than “burning reserves to defend a specific rate.” Reddy also pointed to chief economic advisor Anantha Nageswaran‘s saying he is “not losing sleep” over the rupee’s fall. “The message is clear, the system is willing to tolerate currency adjustment as long as it’s gradual.”
The sole bright spot in this grim landscape is India $283-billion IT industry, which has escaped Trump’s tariff whip. The Big Five IT firms source over 40% of their business from the US. According to Amit Chandra, vice-president of HDFC Securities, a 1% decline in the rupee’s value can boost their operating margin by 10-15 basis points. Additionally, the rupee has depreciated significantly against other currencies of other major regions where these companies do business – the rupee is down 15.47% to ₹120 per pound and 8.32% to ₹105 against the euro this year.
The currency tailwind arrives at a critical juncture for the IT industry, which is experiencing its slowest growth in decades amid weak demand driven by elevated lending rates and reduced client spending.
The rupee’s slide hits importers as well as companies with dollar-denominated debt.
“Companies relying on energy imports, like crude oil and coal, will be negatively affected. Similarly, companies importing commodities like copper and aluminum will also see a negative impact as these prices are linked to the international indices, which is dollar-denominated,” said Shravan Shetty, managing director of management consultancy firm Primus Partners. Unhedged dollar borrowers also face substantial hits.
InterGlobe Aviation Ltd, which operates of IndiGo, India’s largest airline, serves as a stark example. The company posted a significant loss in the September quarter, with foreign exchange costs soaring 12-fold year-on-year to ₹2,892 crore. As the majority of its fleet is on dollar-denominated leases, the weaker rupee undermined its profits despite sound operational metrics.
