Indian Rupee Plunges Over 4 Percent Amid US Tariffs and Foreign Fund Outflows

The Indian rupee has witnessed a sharp depreciation, slipping to a fresh record low of 88.36 against the US dollar in early September 2025. This decline of more than 4 percent over recent weeks has been fueled primarily by escalating concerns over punitive US tariffs on Indian goods and sustained foreign portfolio outflows from Indian equities. The increased tariffs, which have doubled some duties to as high as 50 percent, have raised alarm bells among investors about India’s trade competitiveness and economic growth prospects. Adding to the pressure on the rupee is a firmer US dollar, supported by the Federal Reserve’s hawkish stance amidst mixed economic data. The US dollar index, reflecting the greenback’s strength against a basket of currencies, maintains high levels, tightening emerging market currencies, including the rupee. This dynamic intensifies the rupee’s vulnerability to external shocks and currency fluctuations. The Reserve Bank of India (RBI) has reportedly intervened in the foreign exchange market to stem the rupee’s freefall, engaging in dollar-selling operations to restrict volatility. Despite these efforts, market sentiment remains fragile given the ongoing tariff tensions and a lack of clarity on future trade policies. Analysts highlight that if the tariffs persist for a year, India’s GDP growth could potentially slow by 60 to 80 basis points, impacting overall economic momentum. Indian exporters have expressed concerns over the steep tariffs and are lobbying for government intervention to ease hardship. Some exporters seek temporary concessions such as a rupee conversion window at an exchange rate about 15 percent lower than current levels, around 103 per US dollar, to offset tariff-related losses in the US market. In contrast, the rupee currently trades near record lows close to 88. Year-to-date comparisons indicate the rupee has underperformed relative to other Asian currencies like the Korean won and Chinese yuan, which have strengthened by approximately 5.7 percent and 2.3 percent, respectively. This gap underscores India’s susceptibility to external trade frictions weighing on its currency. The rupee’s depreciation also feeds into inflationary pressures. A weaker currency pushes up the cost of imports including crude oil, metals, and raw materials, thereby elevating domestic fuel prices and manufacturing costs. Corporates face higher debt servicing charges on foreign currency loans, potentially impacting margins and investment plans. India’s fiscal framework is tested as rising import costs and currency volatility challenge macroeconomic stability. The government’s recent Goods and Services Tax (GST) reforms aim to boost consumption and production, but external headwinds such as tariffs and capital outflows complicate the economic outlook. Commodity price volatility, especially in energy markets, directly influences the rupee. Geopolitical risks and supply uncertainties further exacerbate currency pressures. Foreign investment outflows, particularly from portfolio investors unsettled by tariff news and global risk sentiments, add to rupee depreciation risks. Despite a robust economic growth report in the previous quarter, trade and tariff tensions remain a drag on investor confidence. Market watchers anticipate the Reserve Bank of India to monitor currency movements cautiously, balancing intervention to prevent excessive volatility without defending a fixed exchange rate. Looking forward, the rupee’s direction hinges on trade dialogue outcomes, global market conditions, and US monetary policy moves. The Federal Reserve’s planned interest rate decisions and US nonfarm payroll data releases will be critical in shaping near-term dollar strength and emerging market currency trends. The RBI’s continued engagement in forex markets and prudent monetary policy stance will be crucial in navigating this challenging environment. Meanwhile, efforts to resolve trade disputes, encourage FDI inflows, and maintain fiscal discipline remain policy priorities to bolster long-term currency resilience. The rupee’s sustained weakness underscores the delicate balance India faces amid global economic shifts, trade tensions, and domestic fiscal management. Businesses, consumers, and investors watch closely as currency fluctuations influence inflation, trade competitiveness, and capital flows.