Currency strengthens following hold in interest rates by RBI, yet concern over US tariffs remains prevalent
The Indian Rupee (INR) has been on a downward spiral in 2025, with sustained foreign outflows and escalating U.S.-India trade tensions playing significant roles in its weak performance.
The Reserve Bank of India (RBI) has kept its key rate steady at 5.50% in its last meeting, a decision that has contributed to limited domestic support for the Rupee. This move, coupled with rising U.S. interest rates, has strengthened the dollar, making it more attractive globally and causing capital outflows from emerging markets like India. As a result, the Rupee has weakened against the USD by around 1.9% in the past month and about 4.5% over the last year.
The U.S. tariffs on Indian imports, starting from August 1, have intensified the pressure on the Rupee. The cumulative impact of a 50% tariff on Indian goods has dampened investor sentiment, triggered foreign portfolio investor (FPI) outflows, and raised concerns about India's manufacturing growth prospects. Moody’s has warned that such trade tensions could undercut India’s ambitions in manufacturing, potentially reversing recent gains in attracting investments.
The RBI’s cautious monetary stance relative to the U.S. Federal Reserve’s stronger dollar policies and the negative sentiment from U.S. tariffs have kept the Rupee under pressure. The USD/INR rate has recently tested record highs near 88. The Rupee’s underperformance reflects persistent structural factors like high import demand, intermittent foreign capital withdrawals, and deteriorated investor confidence due to trade uncertainties.
In the week through August 1, the rupee experienced its sharpest weekly decline in nearly three years, with a loss of 1.18% against the dollar. However, central bank interventions prevented the rupee from hitting a new record low during this period. Amit Bivalkar, founder director at Sapient Finserv, stated that the downward pressure on the rupee after the 25% tariff is a reason for the RBI not cutting rates.
Looking ahead, the rupee may breach the 88-mark next week based on market signals regarding the tariff threat. The RBI governor mentioned net outflows of $800 million in the current financial year due to outflows in the debt segment. President Donald Trump has threatened "very substantial" additional tariffs due to India's oil imports from Russia. Economists expect steep U.S. tariffs on Indian goods, which could continue putting pressure on the Rupee.
In conclusion, the Indian Rupee's latest weakening is a result of the RBI's cautious monetary stance and significant negative sentiment from U.S. tariffs on Indian goods, which have spurred capital outflows and dampened growth outlooks.
[1] Economic Times [2] Business Standard [3] BloombergQuint [4] Moody's
[1] The weak performance of the Indian Rupee in 2025, a result of various factors including U.S.-India trade tensions and foreign outflows, has been a topic of discussion in financial circles, with economists predicting further pressure on the currency.
[2] The RBI's decision to keep its key rate steady, coupled with rising U.S. interest rates and U.S. tariffs on Indian imports, have contributed to the strengthening of the dollar and the weakening of the Rupee. This highlights the significant impact of foreign trade and finance policies on the Indian economy.
