Rupee may be allowed to weaken further as RBI cushions the blow of 50% US tariffs

The biggest highlight of last month, in our view, was the sovereign rating upgrade by S&P, which was long overdue. The move is likely to attract more capital towards India over the long term, both in debt and equity.

Another key development was the announcement of the rationalization of GST slab rates by PM Modi in his Independence Day speech. This, too, was long overdue.

There seems to be limited room for monetary policy to turn more accommodative, and therefore a fiscal impetus was needed to support and boost consumption.

However, the market’s reaction to these positive developments has been muted.

We believe the cloud of punitive tariffs is preventing these positives from shining through. Trump announced a penalty of 25% on India for procuring crude from Russia. After Trump’s meeting with Putin, it was expected that the 25% penalty might be lifted.

However, the latest comments from Peter Navarro, Trump’s trade advisor, suggest there is unlikely to be any change, and that the 50% tariff rate Indian goods would be subject to will come into effect from 27th August onwards, as announced earlier.The Rupee continues to underperform amid steady Dollar weakness. It is the worst-performing Asian currency year-to-date.The RBI may allow the Rupee to become the casualty if there is no respite on the tariff front, as this would help offset the impact of tariffs to some extent.It is important to note that most of our Asian peers are going to face tariff rates between 20–40%, while India will be subject to 50%.

We need to negate the effect of this tariff differential to remain competitive. The impact could be softened through measures such as subsidies, subventions, adjustment of risk weights in lending to affected sectors, or by way of Rupee adjustment.

So far, the RBI has defended the Rupee, preventing it from hitting new lows against the Dollar. We would not be surprised if the RBI allows the Rupee to weaken further in relative terms to cushion the blow from tariffs.

With Brent below USD 70 per barrel and food inflation remaining benign, the risk of imported inflation from Rupee depreciation is not too high. This should give the RBI leeway to let the Rupee adjust in a calibrated manner.

(The author, Abhishek Goenka is the founder and CEO of IFA Global)

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