Tariff tensions push rupee to record low: Why is the RBI holding back?

“Given the way tariffs have been imposed on India by the US, there could be a thought that a slight depreciation of the rupee will help exporters. Therefore, some weakening of the rupee may be accepted to nullify the tariff impact,” said a forex market analyst.

A weaker rupee benefits exporters by making their products cheaper to foreign buyers, and thereby increasing their competitiveness. The rupee depreciation will negate the impact of the tariff to some extent. India’s foreign exchange reserves, at $690.72 billion, are strong enough to withstand major external shocks and give the Reserve Bank the flexibility to allow a gradual and controlled depreciation of the rupee.

On August 29, the rupee fell to an intraday low of 88.31 level, before finishing the session at record low of 88.20. On September 1, the currency again ended at 88.20 after touching a life time low of 88.33 against the dollar. The domestic currency recovered to 87.84 in intraday trades before settling at 88.16 on Tuesday. It closed at 88.07 after opening at 88.16 against the greenback on Wednesday.

The narrow range in which the rupee traded in the last four trading sessions indicated the limited intervention by the RBI in the foreign exchange market, analysts said.

RBI closely watching

Forex market participants believe the RBI has been actively monitoring the rupee to prevent any sharp or disorderly depreciation beyond its comfort zone. For instance, they said the central bank appeared to defend the 87.80 level, but once the rupee crossed the 88-mark, it allowed further depreciation to proceed.

The RBI, however, has consistently maintained that its interventions in the forex market are aimed at curbing excessive volatility — not at targeting a specific exchange rate. “The breach of the critical 88-mark last week surprised traders, with many noting the Reserve Bank opted not to intervene forcefully, allowing speculative dollar demand to weigh further on the currency,” said Jigar Trivedi, Senior Research Analyst at Reliance Securities.

“When the trade war is on, currency becomes a weapon because you have to safeguard your exporters to the extent possible. They (RBI) will intervene to manage the pace of depreciation, but they may not be very aggressive as seen in the past,” said Anindya Banerjee, Head – Currency, Commodities and Interest Rate, Derivatives, Kotak Securities.

Mecklai Financial Services CEO Dipti Chitale said that until a solution for the current trade tensions is found, a weaker rupee may be necessary to maintain the country’s export competitiveness. This approach appears sensible, especially as the US, a key trading partner, has adopted a confrontational stance on trade tariffs.

Rupee to remain weak

Market participants expect the rupee to remain under pressure and would trade in the 87.50 to 88.50 range in the short term. If the currency breaks 88.50, it may depreciate to 89.90 or 90 levels soon.

“As long as tariff uncertainty remains, we can see the rupee depreciating to 89.90 over the next three to four months,” said VRC Reddy, head of treasury, Karur Vysya Bank. If the trade war intensifies, the rupee could slip below 90 against the dollar. However, if the US and India reach a peaceful resolution on trade disputes, the currency is likely to recover to the 86 range.

Jateen Trivedi, VP Research Analyst – Commodity and Currency, LKP Securities, said optimism around India’s GST reduction move is expected to support consumption and partially offset the negative impact of ongoing tariff pressures.

However, a resolution on tariffs may provide some relief to the currency, Reddy said. Moreover, the RBI is unlikely to allow the rupee to plunge sharply and is expected to use its foreign exchange reserves to prevent any sudden crash.