Asia's currency woes: A rocky road ahead for the Indian rupee
The Indian rupee's turbulent journey
The Indian rupee is facing a challenging start to 2026, with a narrow range of movement on Monday, reflecting the complex interplay of global and domestic factors. Despite improved risk appetite worldwide, steady interbank dollar bids have blunted any positive cues, leaving the rupee's future uncertain.
A tale of two economies: India and the U.S.
The lack of progress on the U.S.-India trade deal has been a significant weight on the rupee's shoulders. With persistent outflows of foreign funds, the rupee has become Asia's worst-performing currency this year. Experts predict a potential drop to 92 against the dollar by the end of March, with any strength largely dependent on a successful trade agreement.
The undervalued rupee and the trade deal conundrum
Hanna Luchnikava-Schorsch, Head of Asia-Pacific Economics at S&P Global Market Intelligence, believes the rupee is currently undervalued. She anticipates a correction once there's more clarity on the U.S.-India trade agreement. S&P Global expects a deal within the next six months, but the road to an agreement is fraught with challenges.
India's high tariffs: A drag on trade talks
India's tariffs are among the highest in the world, reaching a whopping 50%, which is even higher than those imposed on China. These tariffs have been a significant hurdle in trade talks between New Delhi and Washington. The impact of these tariffs is evident in India's exports to the U.S., which fell by nearly 12% in September and 8.5% in October, although there was a sharp rebound in November.
Economic risks and the impact of sustained tariffs
Sonal Varma, Chief Economist at Nomura, highlights the main economic risk for India: the potential loss of momentum in supply chain shifts from firms catering mainly to the U.S. market. Sustained high tariffs could deter these firms from investing in India, impacting the country's economic growth.
The double-edged sword of a weak rupee
A weaker rupee has its advantages and disadvantages. While it can make Indian exports more competitive, it also affects import costs and inflation. However, the low price growth in India may help absorb the impact of imported inflation due to currency depreciation.
Psychological triggers and the 90-mark breach
The Indian currency breached the crucial 90-mark against the dollar at the start of the month, a significant psychological trigger. Starting the year at 85.64 to a dollar, it took less than 15 trading sessions for the currency to cross the 91-rupee mark, highlighting the rapid depreciation.
Bearish foreign investors and outflows
Global investors have been bearish on India for most of the year, with net outflows exceeding $10 billion across investment classes. The key reason for the rupee's fall is not the current account deficit, as it is expected to remain manageable. Somnath Mukherjee, CIO and Senior Managing Partner at ASK Private Wealth, believes the rupee will stay under pressure until foreign portfolio outflows reverse.
The impact of outflows on Indian equities
Outflows have been particularly sharp in Indian equities, with foreign portfolio investors being net sellers on a year-to-date basis, withdrawing nearly $18 billion as of December 19. Luchnikava-Schorsch describes the rupee's depreciation as a double-edged sword for foreign institutional investors (FIIs). While it could be a good entry point for Indian equities, investors will also assess the negative impact of prolonged rupee weakness, trade policy uncertainty, government finances, and the overall growth outlook.
Central bank intervention and market forces
India's central bank has reaffirmed its policy of letting market forces determine the exchange rate. However, reports suggest that the bank intervened "aggressively" on Wednesday to curb the currency's slide. This intervention highlights the bank's commitment to stabilizing the rupee, but the long-term impact remains to be seen.
And here's where it gets controversial: With the Indian rupee's future hanging in the balance, the potential outcomes are vast. Will the trade deal materialize, and if so, what impact will it have on the rupee's strength? How will the central bank's intervention influence the currency's trajectory? These questions remain unanswered, leaving room for speculation and debate. What are your thoughts on the Indian rupee's prospects? Feel free to share your insights and predictions in the comments below!
