Indian Rupee Struggles as Trade Tensions Rise, RBI Meeting in Focus

The Indian rupee weakened past 87 per USD for the first time ever on Monday, hitting a record low, amid a plunge in Asian currencies and stocks after US President Donald Trump levied tariffs on Canada, Mexico, and China over the weekend.

Meantime, foreign investors have already been pulling money out of Indian equities due to concerns over the country’s softening growth rate.

That trend may accelerate as Trump’s tariffs heighten fears about global economic growth, prompting investors to shift toward safer assets like the US dollar.

The broader selloff in emerging markets was further exacerbated by concerns over higher US interest rates, which have been drawing capital away from riskier assets.

Meanwhile, crude oil prices remain elevated, increasing pressure on India’s current account deficit and further weighing on the rupee.

USDINR increased to an all-time high of 86.91.

Over the past 4 weeks, US Dollar Indian Rupee gained 0.86%, and in the last 12 months, it increased 4.52%.

The Indian rupee weakened past 86.6 per USD, approaching the record low of 86.7 earlier in January amid aggressive liquidity injections and the resulting expectations of anticipated rate cuts by the RBI. Tight liquidity conditions stemmed by the RBI’s aggressive interventions on the foreign exchange market to defend the rupee drained bank reserves from key lenders, driving the central bank to a series of cash injections, longer-dated bond purchases, and depletion of its foreign exchange reserves.

The moves to support liquidity conditions raised the consensus that the RBI is due to commence its cutting cycle this quarter, with expectations divided between the two upcoming meetings.

Calls for looser policy followed evidence of a sharp slowdown to India’s economic growth reversed the previous consensus that it would outperform major emerging economies, driving investors to close positions on Indian capital markets and pivot to competing Asian assets.

The Indian rupee weakened past 86.4 per USD, approaching the record low of 86.7 from this month amid higher supply of rupees by the RBI, and the resulting expectations of anticipated rate cuts.

Tight liquidity conditions stemmed by the RBI’s aggressive interventions on the foreign exchange market to defend the rupee drained bank reserves from key banks in the economy, driving the central bank to a series of cash injections, longer-dated bond purchases, and depletion of its foreign exchange reserves.

The moves to support liquidity conditions raised the consensus that the RBI is due to commence its cutting cycle this quarter, with expectations divided between a first rate cut this month or the next.

Calls for looser policy followed evidence of a sharp slowdown to India’s economic growth reversed the previous consensus that it would outperform major emerging economies, driving investors to close positions on Indian capital markets and pivot to competing Asian assets.

The Indian rupee held near the record low of 86.6 per USD mark in January as slower growth increased calls for softer monetary policy by the RBI, accelerating capital outflows and pressured the sustainability of the central bank’s crawling peg.

Evidence of a sharp slowdown to India’s economic growth reversed the previous consensus that it would outperform major emerging economies, driving investors to close positions on Indian capital markets and pivot to competing Asian assets.

This was magnified by expectations that the RBI is due to commence its cutting cycle before the end of the financial year amid lower inflation and a sharp drop in GDP growth.

The latest data indicated that inflation slowed to 5.2% in December, and the preliminary FY2025 GDP slowed to 6.4%, the lowest since FY2020 when excluding pandemic shocks.

To add, the rapid deterioration in foreign exchange reserves raised speculation that the RBI may be forced to start relaxing its support for the currency.

Sumitomo Mitsui Banking Corp. turns relatively more bearish on the Indian rupee, especially for 1H, says Jeff Ng, head of Asia Macro Strategy. India's fundamentals have been less stellar compared with six months ago, he says in a research report, noting 3Q's GDP slowdown. Also, inflation eased to 5.22% in December from a peak of 6.21% two months ago, and some anecdotal reports show actual inflation is lower than reported, Ng says. This is providing RBI with some scope to cut rates, with hopes of a Feb. 7 cut rising, Ng adds. Ng raises his USD/INR end-1Q target to 87.00 from 85.80. USD/INR is little changed at 86.59. (ronnie.harui@wsj.com)