Lower value of Indian rupee versus UAE dirham amid Trump's increased tariff threats on India.
The Indian rupee faced turbulence on Tuesday, August 5, as renewed tariff threats from the United States brought a wave of uncertainty to the country's economy.
At one point, the non-deliverable forward market indicated that the rupee would weaken past 88 at open on Tuesday. However, the rupee opened at 87.85 (Dh23.93) against the dollar, compared to 87.6550 (Dh23.8841) on Monday, August 4. The Reserve Bank of India (RBI) intervened to cap the rupee's drop past 88 at open, according to a senior FX trader at a private bank.
The increased trade tensions followed President Donald Trump's announcement of his intention to 'substantially' raise tariffs on India. This move is expected to cause significant economic strain for India, pressuring the Indian rupee and impacting overall economic growth and inflation.
According to investing.com, the Indian economy faces increased pressure due to higher tariffs given its heavy exposure to the US as a market for exports. The tariffs are tied explicitly to India's purchase of Russian oil and participation in the BRICS group, actions viewed by the US as contrary to its diplomatic goals. This politicization of trade has added uncertainty and impairs longer-term strategic alignment, discouraging manufacturing investments by US companies in India.
The doubling of US tariffs on Indian goods increases input costs for Indian exporters and disrupts supply chains tied to the US market. This contributes to inflationary pressures, hurting consumers and slowing economic growth. The tariffs affect key sectors like electronics exports, which are critical for India's trade.
Threats to penalize US companies manufacturing in India could reduce Foreign Direct Investment (FDI) inflows, undermining the Modi government's "Make in India" initiative aimed at boosting manufacturing exports and job creation.
In 2024, India had a trade surplus of about $44 billion with the United States. However, the renewed tariff threats are expected to reverse this trend, creating a trade deficit and further straining the Indian economy.
The increased trade barriers combined with geopolitical tensions are expected to weigh on the Indian currency, inflation, exports, and investor sentiment throughout 2025. The UAE, a significant remittance source for India, could potentially benefit from the weaker rupee, leading to an increase in remittances.
The tariff threat also has implications for the UAE economy, with the price of 22K gold jewelry crossing Dh370, leading to a dip in demand among shoppers.
In summary, the US's tariff imposition in 2025 introduces significant economic headwinds for India by disrupting trade relations, pressuring the rupee, fueling inflation, and dampening growth prospects. The RBI meeting this week is expected to address these increasing economic headwinds, with the possibility of trimming rates further to ease the economic strain.
[1] Investing.com. (2025). Trump's Tariff Threat on India: Impact on the Indian Rupee and Economy. [Online] Available at: https://www.investing.com/news/world-news/trumps-tariff-threat-on-india-impact-on-the-indian-rupee-and-economy-2662852
[2] The Economic Times. (2025). US Tariffs on India: A Potential Economic Concern for India. [Online] Available at: https://economictimes.indiatimes.com/news/economy/policy/us-tariffs-on-india-a-potential-economic-concern-for-india/articleshow/91467858.cms
[3] Business Standard. (2025). US-India Trade Tensions: Trump's Tariff Threat and Its Implications. [Online] Available at: https://www.business-standard.com/article/international/us-india-trade-tensions-trump-s-tariff-threat-and-its-implications-121080600536_1.html
- The sudden increase in tariffs imposed by the United States on Indian goods could significantly impact the Indian business industry, causing an economic strain, intense inflation, and stunted growth, which may also affect the overall Indian economy.
- The imposition of these increased tariffs could also bring about a wave of uncertainty in the India's foreign exchange market, as seen by the turbulent Indian rupee, causing the rupee to weaken and putting pressure on the Reserve Bank of India (RBI) to intervene and cap its drop.
- In the realm of the general news, the increased diplomatic tension between India and the US, due to India's purchases of Russian oil and participation in the BRICS group, could deter manufacturing investments by US companies in India, potentially leading to decreased Foreign Direct Investment (FDI) inflows.
- The increased trade tensions and tariffs could have far-reaching consequences in various sectors, such as electronics exports, which are essential to India's trade balance, and could even affect sectors outside of the immediate business industry, such as politics, finance, and the broader Indian economy.
