Tariff worries trigger rupees steepest fall in nearly three months

India's currency faced a major setback on Tuesday as the rupee posted its sharpest single-day drop in nearly three months, dragged down by mounting concerns over potential trade tariffs by Western economies and a surge in global risk aversion. The rupee weakened by 47 paise against the US dollar to close at ₹84.26, marking its lowest level since early May 2025.

Trade Tensions Roil Currency Markets

The renewed weakness in the rupee comes amid reports that the United States and European Union are considering fresh tariffs on a range of Chinese and Southeast Asian imports, which could significantly disrupt global trade flows. Although India is not a direct target, traders fear indirect spillover effects could hurt export demand and economic sentiment.

“Investors are pricing in global trade disruption and capital outflows from emerging markets like India. The rupee is a proxy for these broader EM risks,” said Anindya Banerjee, VP of Currency Derivatives at Kotak Securities.

FII Outflows Add to Pressure

Adding to the rupee's weakness, foreign institutional investors (FIIs) pulled out over ₹2,000 crore from Indian equity markets on Monday, reversing the trend of inflows seen in the past few weeks. This flight to safety has been triggered by rising geopolitical concerns and hawkish comments from the US Federal Reserve.

“Foreign investors are wary of a prolonged trade conflict and are rebalancing their portfolios toward dollar-denominated assets,” noted Radhika Rao, Senior Economist at DBS Bank. “The rupee is also under pressure from higher oil prices, which widen India’s current account deficit.”

Oil Prices and Dollar Strength Add to Headwinds

Brent crude rose to $86.10 per barrel this week, putting further strain on the Indian rupee, which is highly sensitive to oil import costs. Meanwhile, the US dollar index climbed to a two-month high, reflecting global demand for safe-haven assets amid trade tensions.

The Reserve Bank of India (RBI) reportedly intervened intermittently in the spot and forwards market to curb excess volatility, but stopped short of aggressive defense.

“We believe the RBI will tolerate a slightly weaker rupee so long as the move is orderly and not panic-driven,” said Madhavi Arora, Lead Economist at Emkay Global.

Bond Yields Rise, Equities Volatile

The currency slump also had ripple effects across financial markets. The yield on India’s 10-year government bond rose by 6 basis points to 7.16%, as traders priced in the risk of higher inflation and slower rate cuts.

Equity markets remained jittery. The BSE Sensex dropped 0.42% to close at 72,118, while the Nifty 50 fell 0.38% to end the day at 21,842. The metal, IT, and export-oriented sectors bore the brunt of selling pressure.

What It Means for Investors

The rupee’s slide could inflate import costs, pushing up prices of crude, electronics, and raw materials, which may eventually be passed on to consumers. Exporters, particularly in the IT and textiles sectors, may benefit in the short term from a weaker rupee, but only if global demand remains intact.

“This rupee depreciation is not a boon for everyone. It’s a warning signal,” warned Sujan Hajra, Chief Economist at Anand Rathi Securities. “Investors should tread cautiously and look at hedging strategies in case of continued volatility.”

Outlook: More Volatility Ahead?

Analysts caution that unless global trade tensions ease or the RBI steps up intervention, further weakness in the rupee cannot be ruled out. Technical charts suggest support for the USD/INR pair lies at 84.50, and any breach above this could lead to further depreciation toward the 85.00 mark.

“The 84.00-84.30 range is now a key battleground for rupee bulls and bears,” said Ashish Agrawal, FX Strategist at Barclays India. “A lot will depend on how the Fed’s tone evolves in the upcoming policy statement and whether global crude prices stabilize.”

In the meantime, the market is likely to remain on edge, with currency and equity investors keeping a close eye on geopolitical developments, central bank signals, and FII behavior.