On Monday, the Indian Rupee plunged to an historical low of around 88.50 against the US Dollar. This dramatic drop has elicited alarm from economic experts as to what may be in store for the currency going forward. The USD/INR exchange rate hit all-time highs. While growth may moderate with the rest of the economy, this bullish trend is likely to continue in the months ahead. This dip comes on the heels of the imposition of new US tariffs on Indian exports. Together, these factors have made Indian goods much less competitive in international markets.
This caused the rupee to plummet amidst many other external economic pressures. Foreign Institutional Investors (FIIs) were the most active participants in this sell-off, pulling out of equities worth Rs. 8,312.66 crores from the Indian markets. Additionally, geopolitical tensions related to India’s continued relations with Russia have further complicated the landscape of the trade. Washington’s recent unilateral decision to raise tariffs on oil imports from India has further soured investor confidence. This decision adds to the already tricklish economic environment for India’s export-led industries.
Economic Impact of US Tariffs
Former U.S. ambassador to India, Richard Verma, blamed the United States’ unilateral imposition of punitive tariffs for the greatest suffering among India’s most important exports. In August, Washington raised tariffs on imports from the subcontinent all the way up to 50%, doubling them from 25%. 2, 2022, officials referenced worries that Indian financial assistance was funding Russian military operations against Ukraine. The change in policy moved away from encouraging the productive nature of Indian goods competing on the global stage. Consequently, exporters are experiencing a direct decline in demand and revenues.
According to analysts, these persistent tariffs may have lasting repercussions for India’s economy. “I doubt it will be market-moving if tariffs are going to stay in place, and even if they are ruled to be illegal, I think Trump will find another legal avenue to implement the tariffs,” stated analysts at Commonwealth Bank of Australia. This continued volatility in trade relations would add additional pressure on the Indian Rupee.
Besides getting hit by the rupee’s continued depreciation, it’s experiencing intense competition from other currencies. Notably, it has become the weakest against the Swiss Franc, reflecting broader trends in currency markets that favor stronger currencies amidst global uncertainty.
Foreign Investment and Market Reactions
Further complicating these issues is the huge selling pressure created by the rapid exit of Foreign Institutional Investors. Between March to June 2020, these investors offloaded equities worth Rs. 24,011.43 crores. This latest sell-off of Rs. 8,312.66 crores indicates that the lack of confidence in foreign investors is growing. This continuing trend raises questions about the long-term stability and growth potential of the Indian economy.
No wonder that the Indian stock market has overreacted to these developments. Still others are now actively re-weighting their portfolios in anticipation of a long stretch of substantial currency fluctuation and upheaval. The rupee is still licking its wounds, as the near-term outlook goes from bearish to bearish-bearish.
In the shadow of these challenges, several positive economic indicators provide glimmers of hope. As per recently released data, India’s Gross Domestic Product (GDP) recorded an astounding quarterly growth of 20.1%. It shot up 7.8% during the second quarter! This unexpected strength may provide some relief to the rupee. It should reinforce investor confidence in India’s economic fundamentals.
Technical Analysis and Market Outlook
In fact, the USD/INR pair has one of the most bullish setups worldwide. It is still holding above the 20-day Exponential Moving Average (EMA), currently close to 87.60. The round number of 89.00 poses a big psychological barrier for traders and analysts watching this pair closely. The 14-day Relative Strength Index (RSI) has found a base on its 60.00 centerline. This suggests that a new longer-term bullish momentum might be forming for USD/INR.
The US Dollar index is now trading around its monthly low near 97.70. This decrease is welcome news amidst the growing uncertainties of the US labor market and economic climate. Market participants will be anxiously awaiting next week’s labor market data. Above all, this data has the potential to further shape the dollar’s trajectory in powerful ways.