How India’s domestic resilience is keeping the INR stable amid global trade chaos

The INR has been relatively stable despite significant volatility created by US tariffs. The bilateral tariffs which were announced on April 2 or liberation day, have swung from unprecedented escalation to unexpected pause. US effective tariff rate which had jumped to 27% at the start of tariff wars has reduced to 17.8% post the pause between US and China. Despite this unprecedented uncertainty, USDINR was relatively stable and so were other EM currencies. The tariff uncertainty triggered risk-off sentiments which haven’t benefited the dollar. US growth exceptionalism was being questioned with markets pricing-in recession risk. Some of the potential negative impact on US economy has reduced with President Trump announcing a pause with China and other trading partners.

During the 90-day pause, the reciprocal tariff increase on India was reduced to 10%. Moreover, US has exempted 32% of its imports from India such as pharmaceuticals, electronic goods, mineral fuels etc. US trade deal with the UK provides insights on what to expect on the potential agreement with India.  The UK trade deal shows that bilateral tariff of 10% is likely to be the baseline and in return the trading partner will need to offer deeper tariff cuts to the US. Moreover, there is focus on origin of value addition, to prevent China from increasing its exports to the US via other countries.

The negative impact on India remains relatively limited at -0.2%ppts on real GDP growth. This is because India is domestic demand driven economy, in contrast to other Asian economies which are export driven. This is one of the factors behind the stability in the INR.

On the external account, FY26 current account deficit is estimated at 1.5% of GDP, after building in decline in merchandise exports. While the direct impact from tariff tensions is limited, there will be an indirect impact of weaker global growth. Crude oil prices are expected to remain low, given weaker global growth conditions and higher OPEC+ supply. Overall, Balance of Payments could be a small surplus in FY26 at US$14bn vs deficit in FY25. Some improvement in net FDI and FPI inflows is expected due to lower repatriation pressure with markets questioning US growth exceptionalism. Hence external metrics remain resilient despite heightened global volatility, adding to USDINR stability.

Another factor adding to stability of INR is reduction in overvaluation. On the REER metric based on 40 trading partners, INR overvaluation has reduced to just 1.5% as or March 2025 from peak of 8.1% in November 2024. This reflects, depreciation of INR as well as substantial reduction in inflation differential between India and its trading partners. Lower overvaluation indicates that depreciation pressures on INR will remain moderate.

Meanwhile, India’s foreign exchange reserves remain more than adequate with import cover tracking at 10 months which remains higher than the taper tantrum low of 6.5 months. This includes spot foreign exchange reserves and RBI forward book.

Hence the combination of a domestic demand driven economy, strong external stability metrics (low current account deficit and adequate foreign exchange reserves) and reduction in overvaluation will keep INR stable against the dollar. There has been some increase in two-way volatility in USDINR since December 2024, reflecting change in RBI’s currency management, rather than change in market assessment.

We expect a mild depreciation trend with USDINR rising to 86.00 to 86.50 by December 2025. Despite dollar weakness, INR is still expected to depreciate due to muted capital inflows. RBI intervention will be to absorb any improvement in capital inflows and add to foreign exchange reserves. This is because of RBI’s forward book which has had a build-up of net dollar short positions at $84.3 billion as of March 2025.

Views are personal. The author is chief economist, IDFC First Bank.