Currency strengthens following the Reserve Bank of India's rate hold, yet American tariff strain remains constant
The ongoing US tariffs on Indian goods have put significant pressure on India’s exports, which in turn affect the Indian Rupee (INR) and the Reserve Bank of India's (RBI) interest rate policies.
The tariffs, escalating to a total of 50% as of August 2025, threaten around $87 billion worth of Indian exports to the US. This export setback has weakened the Indian Rupee as reduced foreign exchange inflows from exports lower demand for the INR in the forex markets.
In response, the RBI may maintain or raise interest rates to curb INR depreciation and inflationary pressures caused by tariff-induced trade shocks. Higher interest rates make domestic assets more attractive, helping to stabilize or support the rupee and manage capital outflows. However, higher rates can also slow domestic growth, complicating the RBI's trade-offs.
Regarding foreign investments, the tariff escalation has already triggered capital outflows. Foreign portfolio investors withdrew around $4 billion across July and August 2025. Declining foreign direct investment (FDI) trends have also been noted amid the uncertainty, worsening capital flow volatility and putting additional pressure on the currency and interest rate management by the RBI.
The RBI has kept the repo rate steady at 5.50% in the mentioned period, but it has not been immune to the downward pressure from the 25% tariff on shipments to the U.S. The rupee slid 1.18% against the dollar in the week through August 1, its sharpest weekly decline in nearly three years. The rupee has not hit a new record low in the mentioned week due to central bank interventions.
The imposition of a 25% tariff on India's shipments to the U.S. from Friday is ongoing, and the rupee may still breach the 88-mark next week based on market signals on tariff threats. The RBI governor made this announcement during the monetary policy announcement.
The Indian government and RBI face the challenge of balancing these effects to sustain growth, stabilize the currency, and attract or retain foreign capital. The complex interplay between reduced export earnings, interest rate adjustments, foreign investment outflows, and economic growth headwinds is a significant concern for India's economic stability.
References: 1. Economic Times 2. BloombergQuint 3. Business Standard
The tariffs on Indian goods continue to pressure India's business sector, as the ongoing disputes with the US affect the country's exports and exports-related finance. This situation has led to a weakened INR, complicated politics regarding trade and economics, and increasing volatility in foreign investments, particularly foreign direct investment (FDI). Meanwhile, the RBI's general-news cycle largely revolves around their adjustments in interest rates to manage INR depreciation and the country's economic stability.
