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 Foreign investors have withdrawn $10.49 billion from India's debt and equity markets this year.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.

The Indian rupee showed signs of strength in early trading on Thursday, appreciating by 10 paise to reach 87.59 against the US dollar. This uptick comes amidst a backdrop of a weakening dollar index and falling Brent crude prices, both factors typically supportive of the Indian currency.

RBI Intervention

The Reserve Bank of India (RBI) played a crucial role in supporting the rupee, intervening in the foreign exchange market to prevent the currency from breaching its all-time low. The central bank reportedly sold dollars at the 87.80 level, effectively creating a resistance point for the rupee's depreciation.

Market Factors

Several factors contributed to the rupee's movement:

• Dollar Index: The dollar index, which measures the greenback against a basket of major currencies, fell 0.16% to 98.07, providing some breathing room for the rupee.
• Crude Oil Prices: Brent crude, a significant import for India, traded 0.76% lower at $67.53 per barrel, potentially easing pressure on the country's import bill and, by extension, the rupee.
• Foreign Institutional Investors (FIIs): Despite the rupee's gains, FIIs continued their selling spree, with outflows amounting to ₹6,516.49 crore, limiting further appreciation of the Indian currency.

Domestic Market Performance

The positive movement in the rupee was in contrast to the performance of domestic equity markets:

This downturn in equity markets likely contributed to the muted gains in the rupee, despite favorable external factors.

US-India Trade Relations

Adding to the complex economic landscape, additional 25% US tariffs on Indian products took effect on Wednesday. This development could potentially impact trade relations between the two countries and may have implications for the rupee's valuation in the coming days.

Outlook

While the rupee has shown resilience, supported by RBI intervention and favorable global factors, the currency faces headwinds from domestic market weakness and ongoing FII outflows. The impact of new US tariffs on Indian goods will be closely watched by market participants as they assess the rupee's near-term trajectory.