The rupee’s southward journey towards 89-90 is unlikely to continue in the near term, said economists and currency analysts in an FE poll. They believe that the Reserve Bank of India (RBI) is not in the favour of excess depreciation.
On Friday, the rupee breached 88 for the first time and closed at an all-time low of 88.20, a couple of days after the US imposed a 50% tariff on Indian exports. While some believe that depreciation will make exports cheaper, thereby cushioning some impact of tariff. But the overwhelming consensus of the 10 experts is that the RBI is unlikely to let it happen too soon.
Sentiment-driven fall, not fundamentals
“Rupee crossing 88 was more sentiment driven rather than fundamentals. Dollar has been weakening in the international markets and the dollar index is below 100. The importers’ rush or the negative sentiment after imposition of the tariffs is a short-term phenomenon,” said Madan Sabnavis, chief economist, Bank of Baroda.
He believes that the rupee will not breach 89. “We have to wait and watch the next two days for further clarity on the rupee. Having said that, if the rupee continues to be above 88, then I can probably take a call that maybe the market is testing 88.50 or 89,” he added.
Agreed Diraj Nim, economist & FX strategist at ANZ Bank, adding that he expects the rupee will adhere to 88.50 as the RBI may not like too much volatility but it should continue to trade with a depreciation bias.
On August 29, the rupee fell to an intra-day low of 88.3. Logging the biggest single day fall in a month, the domestic currency moved 57 paise or 0.65% compared to the previous close. In the current financial year so far, the rupee depreciated 3.21%. For comparison, the rupee fell 2.5% in FY25, 1.5% in FY24, and 8.4% in FY23. In August, the currency declined 0.61%.
RBI’s intervention limits and tariff impact
In FY26, rupee is the worst performing currency among its Asian peers despite weakness in the dollar index. Dollar index has weakened as much as 10%, however, the rupee was unable to gain. The rupee has been under pressure starting January due to tariff uncertainties, border tensions and monetary easing. With an appreciation of 8.2%, the Taiwanese dollar became the most performing currency. This is followed by South Korean won, rising 5.6%.
Apart from tariff pressure, the rupee has a depreciation bias on account of phased CRR cuts increasing liquidity, and negative core inflation differentials with the US. These factors pressure the rupee to weaken, though the RBI is likely to intervene to manage the currency’s decline, according to Madhavankutty G, chief economist, Canara Bank.
However, Gaura Sengupta, chief economist, IDFC FIRST Bank, believes that the chances of rupee breaching 89 sooner is higher as long as the 50% tariff remains. “The only way to counter the 50% tariff and give our exports a fighting chance is with a weaker rupee. With weak foreign inflows and a short forward book, RBI’s ability to intervene is limited.” She added that if the depreciation continues, the rupee can briefly get undervalued compared to our trading partners.
Experts are of the view that rupee will remain as the worst performing currency going ahead. The foreign outflows and competitive disadvantage in terms of relative tariffs will continue to weigh on the domestic currency, they said.
On July 31, Donald Trump announced a 25% tariff on Indian goods along with an additional penalty for higher oil purchases from Russia. Later on August 6, Trump announced a 25% additional tariff on Indian goods, taking the cumulative tariff on India to 50% with effect from August 27.
(With inputs from Kshipra Petkar and Mahesh Nayak)
