Tariffs, trade, and the road to recovery: Can India strengthen the rupee after its 3% fall in a month?

The rupee experienced a significant depreciation throughout July, falling from around ₹85 on July 2 to ₹87.6 on August 7, marking a sharp decline of roughly 3% against the reference currency in a month. "The Indian rupee has depreciated sharply against the dollar over the past month and is among Asia’s worst-performing major currencies, pressured by U.S. tariff announcements and continued FPI outflows,” said Rajani Sinha, chief economist, CareEdge Ratings.

However, India has managed inflation well, keeping it in the 3–4% range. "Excellent progress on inflation control is what gave RBI the confidence for consistent rate cuts recently. So, inflation is not the likely cause of the rupee's recent depreciation," said Pankaj Singh, smallcase manager and founder & principal researcher, SmartWealth.ai.

However, explaining the reason for the sharp decline, Amit Pabari, MD and CEO of CrForex, said, "The sharp 3% depreciation of the rupee can be traced to a combination of geopolitical tensions and economic stress, with the U.S.-India tariff standoff emerging as the primary catalyst. While the global backdrop has favoured many emerging market currencies—buoyed by a nearly 1.85% drop in the dollar index—the rupee has remained an outlier, weighed down by India-specific vulnerabilities.”

One of the primary reasons for the recent decline is the Donald Trump administration’s imposition of steep tariffs on Indian exports. What began with a 25% duty was quickly followed by another 25%, resulting in a total tariff burden of 50% on some goods, the highest among nations.

The move has struck at the core of India’s export engine—pharmaceuticals, textiles, auto components, and gems and jewellery—all of which have high exposure to the U.S. market. "In 2024, the U.S. accounted for nearly 18% of India’s exports, worth around $87 billion. These sectors now face mounting risks of cancelled orders, margin erosion, and job losses," said Pabari.

However, Singh differs. "U.S. tariffs, though attention-grabbing, are likely not the main reason. U.S. trade (mainly pharmaceuticals, gems & jewellery, and electronics) accounts for a small portion of India’s total trade and an even smaller share of its GDP. Hence, tariffs won’t substantially affect GDP or trade balance," he explained. Thus, tariffs may affect our trade on the export side, rather than the import side, which drives currency impact for a net importer. 

"A prolonged slowdown in export earnings risks widening the current account deficit and deepening pressure on the rupee. Additionally, if the trade tensions remain unresolved, FY26 GDP growth could fall below 6%, with a potential drag of 40-50 basis points, twice the earlier projections," said Pabari.

Adding to the challenges is India’s dependence on discounted Russian oil, which now accounts for 35–40% of its crude imports, he added. "Russian oil imports into India are mostly settled in non-USD currencies, but any replacement source would likely require USD settlements, which could increase demand for dollars relative to the rupee," said Singh.

If U.S. pressure forces India to reduce these purchases, the country may have to purchase more expensive oil from alternative sources. "Purchasing oil from other sources will result in an annual import bill increase of $9–11 billion," said Pabari. This would not only strain the trade balance but also magnify downward pressure on the currency.

Meanwhile, RBI kept the repo rate unchanged at 5.50% and maintained a neutral stance in the August monetary policy review. However, a $9.3 billion decline in foreign exchange reserves—to $688.9 billion—indicates that the central bank has been actively intervening in the currency market to support the rupee amid growing external pressures.

Road to recovery 

To recover and restore rupee stability, India will need to take a multi-pronged approach. "Foremost is the need to ease external trade tensions, particularly with the U.S., through renewed diplomatic efforts aimed at resolving the tariff standoff. A de-escalation on this front could help restore market confidence and reduce pressure on India’s key export sectors," said Pabari.

"A strengthening yuan should also ease some pressure on the rupee. While U.S. tariffs disadvantage India relative to peers like Vietnam and Indonesia, they appear to be a negotiation tool. With implementation not immediate, there is scope for India to negotiate a more favourable outcome, which could ease pressure on the rupee. Trade talks will be key to watch, alongside global oil dynamics," said Sinha.

Brent crude oil prices currently remain around comfortable levels of $63-64 per barrel, but risks persist from U.S. secondary sanctions on Russian oil buyers, which could impact global oil supply. Although OPEC is raising output and has spare capacity, global oil dynamics could shift and may impact the rupee.

India is seeking new oil sources. If such a trade can be settled in rupees, the currency depreciation can not only be arrested, but also potentially reversed. This is the most impactful thing India could do.

"Equally important will be the diversification of both export destinations and energy sources. Reducing overdependence on any single market or crude supplier would enhance India’s resilience to future geopolitical shocks. In parallel, attracting stable and sustained foreign capital, whether through FDI or portfolio inflows, will be crucial to offset external account imbalances and support the rupee," said Pabari.

Hence, until such measures gain traction, the rupee is likely to remain vulnerable. Despite a broadly weaker dollar, the USD/INR pair remains under pressure, reflecting the weight of domestic challenges.