The Indian rupee reached a new milestone on Friday, breaching the 88 mark against the US dollar for the first time. This development has sparked discussions among market participants about the Reserve Bank of India's (RBI) potential strategy regarding currency depreciation, especially in light of possible tariffs from the Trump administration.

Currency Flexibility Under New Leadership

Under the guidance of RBI Governor Sanjay Malhotra, the rupee has demonstrated increased flexibility in recent months. Since March, when it stood at 85.47 against the dollar, the Indian currency has depreciated by over 3.30%. This shift has led some market observers to speculate that the RBI may have reduced its intervention in the forex market.

Impact on Businesses

The weakening rupee is creating challenges for various sectors of the Indian economy:

• Importers: Companies with unhedged positions are facing increased costs.
• Corporates: Businesses holding forex derivative deals like 'Seagulls' with strike prices above 88 are potentially exposed to losses.

Many companies had based their financial strategies on the assumption that the rupee would remain range-bound, a belief rooted in the previous RBI policy under former Governor Shaktikanta Das.

Potential Benefits of a Weaker Rupee

Despite the challenges, a depreciating rupee could have some positive effects:

1. Enhanced export competitiveness
2. Potentially larger RBI surplus, leading to increased government dividend payouts

Global Factors and Future Outlook

The upcoming US non-farm payroll report is expected to play a crucial role in determining the rupee's near-term direction. Market analysts suggest that potential downward revisions in the report could raise hopes for US interest rate cuts, which might provide some support to the Indian currency.

As the situation continues to evolve, all eyes remain on the RBI's approach to managing currency flexibility in the face of global economic pressures and potential policy shifts in major economies.

The Indian rupee dropped past 88 per dollar for the first time, reaching a record low of 88.24 as markets reacted to additional US tariffs on Indian goods. Washington imposed an additional 25% tariff on Indian goods, doubling total duties to 50%. This significant depreciation represents ongoing challenges in the forex market.

Currency Movement

The rupee also weakened to a record low of 12.33 against the offshore Chinese yuan, declining 1.20% weekly and 1.60% monthly. This contrasts with Chinese goods facing lower 30% US tariffs. The weaker rupee against the yuan could boost competitiveness for Indian exporters in sectors like textiles, engineering goods, and chemicals, where both countries compete for US markets.

Factors Influencing Rupee's Decline

US Trade Policies and Indian Exports

The implementation of US tariffs is anticipated to have a negative impact on Indian exports, potentially widening the trade deficit. The yuan-rupee rate is tracked by the Reserve Bank of India (RBI) as a key metric.

RBI Intervention

While the rupee fell over 1% against the yuan this week, it weakened only 0.30% versus the dollar, with RBI intervention helping contain the decline. However, this intervention has led to a significant drop in India's foreign exchange reserves.

Forex Reserves Decline

India's foreign exchange reserves declined to $690.72 billion for the week ended August 22, falling $4.39 billion from the previous week's $695.10 billion. This decline is attributed to RBI intervention in currency markets to support the rupee against a strong dollar.

Key changes in reserves include:

• Foreign currency assets decreased $3.65 billion to $582.25 billion
• Gold reserves fell $0.67 billion to $85.00 billion

Despite the decline, India maintains the fourth-largest forex reserves globally after China, Japan, and Switzerland, with holdings sufficient to cover nearly a year of imports.

Market Reactions

Foreign institutional investors sold equities worth Rs 3,592.70 crore on Thursday, contributing to currency pressure. Foreign investors have withdrawn $10.49 billion from India's debt and equity markets this year.

Government Response

In response to these challenges, the Indian government is developing support measures for exporters. These initiatives include:

• Export promotion missions
• Loan moratoriums

These measures aim to mitigate the impact of the 50% US tariffs imposed on Indian goods, providing some relief to the export sector.

The ongoing currency fluctuations, trade tensions, and declining forex reserves highlight the complex interplay of various economic factors affecting Indian financial markets and underscore the need for continued monitoring and adaptive policies.