The Indian rupee has emerged as the world's hardest-hit currency in the face of punitive US tariffs, with analysts warning of further declines until New Delhi and Washington finalize a trade agreement. The currency has depreciated by approximately 6% against the US dollar this year, plunging to an all-time low of 91.075 per dollar.
Why the Rupee's Fall is Different This Time
Despite the rupee's real effective exchange rate hitting a decade-low of 96, signaling it is deeply undervalued, market sentiment remains bleak. The primary driver is a perfect storm of a widening trade deficit, punitive 50% US tariffs on certain Indian goods, and massive investment outflows. Foreign investors have pulled a staggering $18 billion from Indian equities in 2025, a record exodus that continues to pressure the currency.
"I think the market's patience in general is running thin," stated Vivek Rajpal, Asia macro strategist at JB Drax Honore. He noted that while Indian assets are at a good entry point, the market first needs confidence that the high US tariffs are only temporary. Months of trade talks have yet to yield a deal or relief.
India's Chief Economic Advisor indicated in a recent Bloomberg interview that an agreement with the US is expected by March 2026. However, with much of Asia already having agreements or moratoriums with the US, India remains uniquely exposed, forcing the rupee to act as the economy's shock absorber.
A Dilemma for Global Investors
The rupee's weakness presents a complex puzzle for international money managers. A weaker currency can help offset tariff costs by making exports cheaper in dollar terms. However, the 50% tariff rate is so severe that economists believe the rupee needs to fall even more to neutralize its impact. This is compounded by the trade deficit and continuous portfolio outflows.
In dollar terms, Indian equities have severely underperformed. The MSCI India index has gained less than 2% this year, compared to a nearly 30% surge in the MSCI China index. The benchmark Nifty 50 is up about 10%, lagging the 26% rise in the MSCI Emerging Market Index, partly due to a lack of clear AI-focused investment opportunities.
"Depreciation of the rupee is necessary to improve the competitiveness of Indian exports," said Kunjal Gala, Head of Global Emerging Markets at Federated Hermes. "However, a depreciating rupee creates a dilemma for global investors who are indexed to the dollar."
Comparing with China and the Road Ahead
Investors are looking at China's experience during former President Donald Trump's first term as a potential roadmap. The yuan depreciated roughly 12% between March 2018 and May 2020 amid trade tensions.
Jitania Kandhari of Morgan Stanley Investment Management compared the rupee's fall to the yuan's past depreciation. She suggested the rupee may need to keep weakening if the tariffs persist. Her firm, managing $1.8 trillion, remains overweight on Indian stocks but has trimmed holdings.
While brokerages like Citi, Goldman Sachs, and JP Morgan have upgraded Indian equities recently—anticipating a turnaround in 2026 aided by rate cuts—the immediate outlook for the rupee is cautious. A Reuters report suggesting the Reserve Bank of India may not aggressively defend the currency has reinforced expectations of further weakness.
London-based Jean‑Charles Sambor of TT International Asset Management noted that geopolitical risk has influenced the rupee's rapid drop. "We believe some of this risk may be now overstated," he said, though market flows do not yet indicate investors are rushing to buy the battered currency.
