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Informist, Wednesday, Aug. 20, 2025

 

By Pratiksha

 

MUMBAI – The rupee has jumped sharply against the dollar in recent sessions as investors' risk appetite improved after India announced an overhaul of the goods and services tax system and S&P upgraded India's credit rating to investment grade 'BBB'. However, market participants do not see this positive momentum sustaining as uncertainties related to US tariffs continue to weigh on the Indian unit.    

 

The Indian currency has gained over 0.5% against the dollar so far this week, and settled above the 87-per-dollar mark on Tuesday, the first time in three weeks, before slipping again below that key level.

 

In his Independence Day speech, Prime Minister Narendra Modi announced that the GST reforms will be announced by Diwali. The Centre has proposed moving towards a simple tax structure with just two slabs--standard and merit--from the current four-rate structure of 5%, 12%, 18% and 28%. 

 

Notwithstanding this long-pending reform and the once in 18 years ratings upgrade, most foreign exchange dealers expect the rupee's appreciation to be capped at 86.50 a dollar. "From the levels that rupee was earlier trading at, this pullback was anyway expected after the underperformance (in rupee) when the US tariff announcement came in," Dhiraj Nim, FX strategist at ANZ Bank India, said. "But would it become a sustainable rally? I don't think so. Fact remains that most growth risks that we were extremely worried about are not out of the picture yet. So, we need to be cautious around this rally."

 

While foreign portfolio investors have started infusing money into Indian markets in the last few sessions, market participants are still unsure if this will continue in the near term. "I think the selling (of dollars) in the last few days was a knee-jerk reaction. The sentiment has not shifted entirely in favour of the rupee," a senior treasury official at a state-owned bank said.

 

US President Donald Trump has slapped an additional 25% punitive tariff on Indian goods, on top of a 25% tariff announced previously, citing New Delhi's continued purchases of Russian oil. The additional 25% tariff will be levied from Aug. 27.

 

Market participants are uncertain about the possibility of an interim trade deal between India and the US before the deadline as negotiations between New Delhi and Washington have hit a near-deadlock after multiple rounds of negotiations, over the US' demand to get access to India's farm and dairy sector and halting Russian oil purchases. 

 

US Treasury Secretary Scott Bessent last week said several large trade agreements were still waiting to be completed, including with Switzerland and India, but the South Asian country had been "a bit recalcitrant" in talks with the US. Moreover, a commerce ministry official said Monday that the next round of negotiations between India and the US for a bilateral trade agreement, expected to begin Aug. 25, has now been postponed without a new date, further dashing market participants' hope of a reprieve from the 50% tariff regime. 

 

"The recent news has been sentimentally positive but immediately you will not see a flood of money into India. One has to see the global factors also. There is uncertainty across the globe," V.R.C. Reddy, head of treasury at Karur Vysya Bank, said. "Unless there is clarity on the global front, FPI money may not flow into India. You need uncertainty off the way, then only we can see some concrete flows."

 

If Trump's proposed 50% tariffs on India come into effect, most currency dealers expect the rupee to fall past the psychologically-crucial 88-per-dollar mark, even potentially depreciating to 88.50 a dollar. "I think market has not fully priced in the impact of 50% tariffs yet and RBI has also defended the rupee against those expectations the last couple of weeks. They have burnt a fair amount of firepower," Nim said. 

 

The rupee fared well, even outperformed its peers, despite Trump announcing additional tariffs on Indian goods on Aug. 6 as the central bank aggressively intervened in the domestic spot and offshore non-deliverable forwards market to prevent a sharp depreciation of the Indian unit.

 

Market participants pointed out that if the 50% US tariffs come into effect, the central bank might let the rupee weaken as it may help cushion the hit to exporters from higher US tariffs. A weaker rupee would provide India trade competitiveness against its trading partners and potentially offset at least some of the impact of US tariff hike, they said. 

 

Going by the current market sentiment, unless there is any positive development on the US tariff front, even a radio silence on the news flow related to this will act as a deterrent to the rupee.  End

 

US$1 = INR 87.06

 

Edited by Avishek Dutta

 

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