Currency faces six-month setback due to lingering concerns over American tariffs
The Reserve Bank of India (RBI) has been actively intervening in the foreign exchange market to prevent a deeper slide in the Indian rupee, according to traders. This intervention comes as market participants expect another drop in foreign exchange reserves, following a decline of more than $9 billion in the week ended August 1.
The RBI has not only been intervening in the spot market but has also resumed intervention in the NDF (Non-Deliverable Forward) market to manage rupee volatility, as reported by four bankers to Reuters.
Despite the RBI's efforts, the Indian rupee ended a five-consecutive-week losing streak, marking its largest weekly drop in six months. The rupee closed at 87.6550 against the U.S. dollar, slightly higher than the previous day's close of 87.7025. However, over the past five weeks, the rupee has depreciated nearly 3%.
The escalating trade tensions between India and the United States have been a significant factor in the rupee's depreciation. The new tariffs on Indian goods have unsettled markets, raising concerns about the impact on capital flows and investor sentiment towards Indian assets.
The trade tensions resulted in a new 25% tariff on Indian goods, placing India alongside Brazil, facing the steepest import duties. This tariff covers roughly 55% of Indian exports to the U.S., affecting major sectors such as textiles, gems, and machinery.
The trade tensions have triggered a nationalist backlash in India, including consumer boycotts of American brands, further straining commercial relations and amplifying market uncertainty. Indian stock markets declined sharply following the tariff hike announcement, with foreign investors withdrawing billions amid valuation pressures on U.S. firms tied to India.
Economically, the rupee's depreciation reflects the combined effect of trade uncertainties, worsening investor sentiment, and retaliatory measures from India. Experts and former officials emphasize that a 50% tariff is unsustainable and damages the prospects for a strategic partnership between the two nations, implying that these tensions may have long-lasting geopolitical and financial consequences.
Some remain hopeful that a resolution to the trade tensions will be achieved in the coming period. Nishit Master, portfolio manager at Axis Securities PMS, stated that there is a high probability that the U.S. will lower tariffs on Indian goods in the coming weeks or months, which could lead to a relief rally in Indian markets.
In summary, the U.S.-India trade tensions and the resulting tariffs have directly contributed to weakening the Indian rupee against the U.S. dollar, increasing trade costs and financial market volatility for both countries. The ongoing trade tensions have significant economic and geopolitical implications for both nations and the global economy.
- The trade tensions between India and the United States have led to concerns about the impact on capital flows, investor sentiment, and the prospects for strategic partnerships, making it necessary for market participants to closely monitor the finance and banking-and-insurance sectors as they analyze the potential for investing in Indian assets.
- The escalating trade tensions have triggered various reactions, including consumer boycotts of American brands and interventions by the Reserve Bank of India (RBI) in both the spot market and the NDF market, with the aim of managing the volatility in the rupee, an essential factor in the finance and foreign exchange industry.
