Rupee may test 88.5 levels amid tariff tensions, FPI selloff: Analysts

Indian Rupee outlook: Analysts suggest that the local unit might largely stay range-bound between 86.50 to 88.50 levels

The Indian Rupee is expected to be vulnerable in the short term as the US President's 50 per cent tariffs have triggered a risk-off sentiment from foreign portfolio investors (FPIs). However, the Reserve Bank of India's (RBI) intervention might cap heavy losses in the currency. 

 

Analysts noted that the domestic unit is likely to remain range-bound, with the currency falling to the 88.5 level in the worst-case scenario. 

 

The Rupee is currently trading near the 87.6 mark and has depreciated 2.39 per cent so far this year, with July's fall being the worst since September 2023.

 

Donald Trump on Wednesday ramped up the tariff tensions with India by slapping an additional 25 per cent. The US had already announced a 25 per cent tariff on Indian imports, set to take effect from August 7. The additional 25 per cent duty will apply to shipments arriving from August 28 onwards.

 

The impact is going to be serious as the exports will fall in the short term, Anil Kumar Bhansali, head of treasury and executive director at Finrex Treasury Advisors LLP, said. "FPIs will continue to remain sellers of equity and debt with the US, European, and other markets doing well."

 

FPIs have been net sellers for 14 straight sessions in the equity market, totalling nearly ₹45,000 crore, according to provisional NSE data. Experts reckon that this selloff might deepen further after the latest tariff tweak. 

 

There may remain some pressure on the FPI flows in debt and equity until there is more clarity on the India-US tariff front, said Kunal Sodhani, vice president at Shinhan Bank India. In the short term, currency markets have already witnessed knee-jerk depreciation on the back of persistent tariff threats, outflows from domestic equity markets and panic buying by importers, Sodhani said.

 

The dollar index, unable to find a clear direction, is also adding to pressure on the rupee, Sodhani added. The measure of the greenback against a basket of six major currencies has remained volatile and is down 0.06 per cent so far this year.

 

Meanwhile, RBI Governor Sanjay Malhotra said at the post-monetary policy press conference that the volatility in the Rupee is set to continue in the short term, but is modest against major global currencies. "There will be some volatility in the rupee as we are living in uncertain times. The volatility is not only in our currency but in other currencies as well, including the US," he said.

Where is Rupee headed?

Bhansali suggests that the local unit might largely stay range-bound between 86.50 to 88.50, with any agreement between the two countries taking it higher.

 

For the dollar-rupee pair, breaking the onshore all-time highs of 87.95 will open doors to uncharted territory and may let the pair test 88.50 levels, Sodhani said. Any close below 87.50 may bring consolidation to the pair in the 86.80-87.60 levels.

 

From the current levels to the calendar year end, average CAGR depreciation in Rupee of around 3.5 per cent may be seen, Sodhani added.

 

In the near term, the currency will be influenced by FPI flows, RBI interventions, and the broader trend of the US dollar overseas, analysts said.