Rupee hits new low on additional tariff fears and foreign outflows

High bond yields have bearing on borrowing, says FM

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The rupee hit a fresh low on Friday on the back of foreign outflows and worries around additional US tariffs, said dealers. However, the Reserve Bank of India (RBI) intervened in the foreign exchange market via dollar sales, which cut rupee’s losses. 

The local currency depreciated by 0.13 per cent to settle at 88.26 per dollar, against the previous close of 88.15 per dollar. The rupee slipped to 88.37 per dollar during the day before regaining some ground by the end of the trade. 

The Indian unit has been one of the worst performing Asian currencies so far in 2025, depreciating 3 per cent. 

“The foreign outflows were because of additional tariff fears,” said a dealer at a state-owned bank. “Nationalised banks were on (dollar) selling side, hence, we saw some reversal by the last hour,” he added. 

After already imposing steep tariffs of 50 per cent on Indian goods, the highest among other trading nations (only Brazil faces 50 per cent tariff), the market speculation suggests the US may be considering restrictions on IT services, outsourced processes, and remote work. 

Though unconfirmed, the chatter unsettled traders, given the critical role of services exports in supporting India’s current 

account. 

 

US President Donald Trump’s latest tariff threats on semiconductor imports have only added to the uncertainty clouding the global trade outlook, weighing on risk assets across the board. “The Indian rupee traded with high volatility today (Friday), opening 5.5 paise stronger at 88.09 against the US dollar before slipping to a record low of 88.365 by mid-day. The move reflected a tug-of-war between temporary support and persistent headwinds,” said Abhishek Goenka, founder and chief executive officer (CEO) of IFA Global.

 

"Rupee experienced its second consecutive weekly decline against the dollar. This depreciation was driven by continued capital outflows and uncertainty surrounding the US-India trade deal. Despite positive domestic developments during the week, the rupee weakened as the dollar recovered while the Chinese yuan declined versus the dollar after four weeks of gain,” said Dilip Parmar, senior research analyst, HDFC Securities.

 

Market participants said that the outlook for rupee remains caught between short-term relief from a more dovish Fed and longer-term pressures stemming from trade frictions and capital outflows. Near-term weakness is likely to persist, driven by US pressure on India’s Russian oil imports, and the adverse impact of tariffs on labour-intensive sectors such as textiles, gems & jewellery, and aquaculture (particularly shrimp exports). With fiscal space limited by recent goods and services tax (GST) rate cuts and ongoing consolidation efforts, a weaker rupee may offer only near-term cushion for exporters, they said.

 

Meanwhile, Finance Minister (FM) Nirmala Sitharaman indicated elevated bond yields are impacting government’s market borrowing.

 

"It is not affordable at a time when interest rates are otherwise low. Bond yields becoming unsustainably high has a big bearing on the government," Sitharaman said in an interview with CNBC-TV18.

 

The yield of the 10-year benchmark government bond hardened almost 22 basis points (bps) since the 100 bps cut in policy repo rate by the RBI in June due to a host of factors, including fading rate-cut hopes, higher borrowing by states, and fear of fiscal slippages.

 

However, since the announcement of GST rate rationalisation earlier this week, yields are having a softening bias as loss to the exchequer is lower than what was anticipated.

 

Bond yields softened on Friday, with the yield of the 10-year bond ending the day at 6.47 per cent as compared to 6.49 per cent on Thursday.