Rupee Slides to ₹86.45 Against the Dollar as Trade War Heats Up

Rupee Under Pressure Amid Trade Crosswinds

The Indian rupee has exhibited a weakening trend, extending its decline for the third consecutive session. This comes against a backdrop of escalating global trade tensions, primarily stemming from heightened tariffs imposed by the United States on China.

INR’s Recent Trajectory

The Indian rupee opened 19 paise lower at ₹86.45 against the US dollar on Wednesday after closing at ₹86.26 on Tuesday. Bloomberg data showed it traded as low as ₹86.52 in the early trade on Wednesday, with the total erosion over the past three days being 0.84 per cent.

RBI's Policy Stance in Focus

The RBI’s MPC has announced its latest monetary policy decision today, Wednesday. Governor Sanjay Malhotra has announced a 25-basis-point reduction in the benchmark interest rate. Investors are particularly attentive to Governor Sanjay Malhotra’s commentary, seeking insights into the central bank’s assessment of the global uncertainties emanating from US President Donald Trump’s trade policies.

Global Trade Turmoil and Yuan Depreciation

The imposition of a 50 per cent additional tariff on China by President Trump has intensified the existing tariffs war, effectively raising the total levy to 104 per cent. This development has reverberated across currency markets. The dollar index, which tracks the US dollar’s strength against a basket of major currencies, experienced a 0.62 per cent decline to 102.32 as of 9:10 AM IST.

Interestingly, the rupee has weakened despite traditional supportive factors such as falling crude oil prices and a softening US dollar. Experts suggest that a combination of domestic liquidity measures and external shocks, notably the weakening of the Chinese Yuan, have contributed to this pressure. The Yuan has depreciated to its lowest level since September 2023, following signals that the People’s Bank of China might be adopting a more lenient stance towards currency depreciation to counter the impact of US tariffs.

Concerns Over India's Competitiveness

The sharp depreciation of the Yuan has sparked concerns regarding India’s external competitiveness. According to Amit Pabari, managing director at CR Forex Advisors, a weaker Yuan provides Chinese exporters with a significant advantage. While Pabari acknowledges that the 25-basis-point rate cut could exert near-term pressure on the INR, he anticipates that increased government spending will ultimately bolster economic growth, offering medium-term support to the domestic currency. Pabari foresees strong resistance for the INR around the ₹86.40–₹86.50 levels, with ₹85.70 likely to act as a crucial support level.

Crude Oil Prices Continue Decline

Crude oil prices have extended their downward trend for the fifth consecutive session, reaching a four-year low amidst ongoing caution surrounding the trade war. As of 9:20 AM IST, Brent crude oil was down 2.77 per cent to $61.08 per barrel, while West Texas Intermediate (WTI) crude saw a 3.11 per cent increase to $57.73 per barrel.

Treasury Holdings and Market Sentiment

Regarding the holding of US treasuries, Anil Kumar Bhansali, head of treasury and executive director of Finrex Treasury Advisors LLP, noted that while China has been selling US treasuries for the past two days, India and Japan appear to have ruled out such a move. Bhansali also stated that the “Indian ₹ will open weaker due to risk of sentiments of the market”. The market’s immediate focus remains firmly anchored on the RBI’s forthcoming policy announcement and Governor Malhotra’s perspectives on navigating the current complex global economic landscape.

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