Rupee at 89/$? Global uncertainty and impact on Indian financial market

USD/INR is expected to trade with a depreciation bias, around 88-89 by the end of FY26

India's direct export loss from US reciprocal tariffs could be limited to around 0.1% of GDP, but the broader impact through indirect channels could be significant, as per a new report by CareEdge Ratings, which has raised concerns about the escalating global trade tensions. 

 

With trade conflicts intensifying under the leadership of US President Donald Trump, including tariffs targeting China, Canada, and Mexico, the global economic outlook has worsened, with the Organization for Economic Cooperation and Development (OECD) revising its global growth forecast downward.

 

Since assuming office, President Trump has initiated multiple tariff actions against major trade partners, and on the horizon, he has threatened to introduce reciprocal tariffs targeting additional economies, the details of which are expected to be disclosed on April 2, 2025. These ongoing measures have stoked concerns about heightened risks to global trade and economic growth. In response, the OECD has adjusted its global growth forecast for 2025 to 3.1%, down from the previously projected 3.3%. Similarly, the 2026 forecast has been lowered to 3.0%, reflecting the adverse impact of these trade tensions.

 

 

Implications for India

India faces the risk of reciprocal tariffs from the US due to its goods trade surplus of $35 billion with the US (in FY24) and higher average tariffs on US imports (12%) compared to US tariffs on Indian imports (3%). The CareEdge Ratings analysis suggests that if the US imposes an additional 8% tariff on Indian imports, direct export losses could be limited to around $3.1 billion annually (approximately 0.1% of GDP), assuming that likely weakening of rupee will partially blunt the impact of higher tariffs. 

 

However, the report emphasizes that indirect impact of a global trade war could be more significant through weaker overall exports, investment and consumption sentiment, and currency volatility. India’s domestic-driven economy provides some resilience, with exports accounting for 21% of GDP in FY24. In contrast, some other Asian economies, such as Thailand, have a much larger export dependency, with exports accounting for around 60% of GDP. Nevertheless, broader global uncertainties could weigh on Indian economy.

 

CareEdge Ratings projects a slight widening of India's Current Account Deficit (CAD) to 1.1% of GDP in FY26 due to a slowdown in global trade stemming from trade tensions. While goods exports may face headwinds, resilient services exports and favorable crude oil prices (assumed Brent at USD 65-75/barrel for FY26) should mitigate the impact.

 

In simple terms, the growing trade tensions between countries, especially between the United States and others, are starting to affect India. Here’s how it could impact India:

 

Risk of Higher Tariffs on Indian Goods: India sells a lot of goods to the United States, and the U.S. has been putting higher taxes (called tariffs) on goods coming from other countries like China, Mexico, and Canada. India could also face higher tariffs from the U.S. because India sells more goods to the U.S. than it buys from them, and U.S. tariffs on Indian goods are already higher than the tariffs India charges on American products. If the U.S. raises these tariffs by another 8%, India could lose around $3 billion in exports. But this loss would only make up a small part (about 0.1%) of India’s overall economy.

 

Weaker Exports and Slower Growth: Beyond the direct impact of tariffs, India’s overall exports (goods and services) could suffer because of global trade issues. If the global economy slows down, countries may buy less from India. This can also affect Indian businesses, investment, and even consumer spending.

 

Current Account Deficit (CAD) Could Widen: India may also see a slight increase in its current account deficit (CAD). This is the gap between the money India earns from exports and the money it spends on imports. For FY26, this gap could widen to about 1.1% of India’s total economic output. However, services like IT exports and lower oil prices could help reduce the negative effects.

 

Pressure on the Indian Rupee (INR): The Indian rupee has been losing value against the U.S. dollar, partly because foreign investors have been pulling their money out of Indian markets. If the rupee keeps weakening, it will make imports more expensive and could add pressure on India’s economy. Experts at CareEdge Rating predict that the rupee might weaken even more in the coming years, though the Reserve Bank of India (RBI) may step in to try to stabilize it.

 

CareEdge Ratings projects the USD/INR exchange rate to depreciate further to around 88-89 by FY26 amidst global uncertainties. However, the Reserve Bank of India (RBI) is expected to intervene to limit excessive volatility.

 

Possible Interest Rate Cuts: To support the economy and boost growth, the Reserve Bank of India might reduce interest rates (the cost of borrowing money) by 0.25% to 0.50% in the next year. This could make loans cheaper and encourage more spending and investment.