Indian Rupee sees more downside as US tariffs on India set to kick in

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The Indian Rupee is expected to see more downside against the US Dollar (USD) as increased tariffs on imports from India to the United States (US) are set to come into effect at 12:01 AM EDT or 09:31 PM IST.

The Indian Rupee is exposed to more downside as US tariffs will kick in at 12:01 AM EDT or 09:31 PM IST on Wednesday.
This month, the US increased tariffs on India to 50%, accusing the nation of funding the Russian war with Ukraine.
Higher tariffs by the US on India will weaken the competitiveness of Indian products in the global market.

The impact of US tariffs on the USD/INR pair will be seen on Thursday as Indian markets are closed on Wednesday on account of Ganesh Chaturthi. On Tuesday, the USD/INR ended marginally higher at 87.77.

A letter by the US Homeland Security confirmed in early trade on Tuesday, stating that Washington will impose an additional 25% tariff on all Indian-origin goods, resulting in a total of 50% reciprocal duty.

Earlier this month, US President Donald Trump penalized India by increasing tariffs to 50% for buying Oil from Russia. Washington accused New Delhi of buying Russian Oil, stating that their money is funding Moscow’s defence and equipment to continue attacks on Ukraine.

In response, New Delhi released a six-point note stating that Trump’s tariffs are “unjustified and unreasonable”, and India will take all necessary steps to protect its interests and economic security.

The impact of US tariffs on India is expected to be severe on domestic exporters. Higher tariffs on Indian products by the US would weaken their competitiveness in the global market, which would force them to compromise on their selling price to withstand competition.

USD/INR technical analysis

USD/INR closed at 87.77 on Tuesday, which is 0.55% lower than its all-time high of 88.25.

The near-term trend of the pair remains bullish as it holds above the 20-day Exponential Moving Average (EMA), which trades near 8742.

The 14-day Relative Strength Index (RSI) rises above 60.00. A fresh bullish momentum would emerge if the RSI holds above that level.

Looking down, the July 28 low around 86.55 will act as key support for the major. On the upside, the August 5 high around 88.25 will be a critical hurdle for the pair.

Indian Rupee FAQs

What are the key factors driving the Indian Rupee?

The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.

How do the decisions of the Reserve Bank of India impact the Indian Rupee?

The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.

What macroeconomic factors influence the value of the Indian Rupee?

Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.

How does inflation impact the Indian Rupee?

Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.