Dollar, Yuan hammer Rupee to record lows as Trump tariffs bite

The Indian rupee plunged to a fresh all-time low of 88.1712 against the U.S. dollar on Friday, breaching its previous record of 87.9563 set in February, as escalating U.S. tariffs on Indian goods amplified pressures on Asia's worst-performing currency this year.

The currency's sharp depreciation, down 0.6% for the session, was triggered by investor jitters over U.S. President Donald Trump's doubling of tariffs to 50% on most Indian imports, effective Aug. 27, in retaliation for New Delhi's purchases of discounted Russian oil. The move, which adds a punitive 25% levy on top of an earlier 25% reciprocal duty, threatens $87 billion in annual Indian exports to the United States, India's largest single market, and could shave 0.3-0.5 percentage points off the country's GDP growth this fiscal year, economists estimate.

The rupee's woes were compounded by a broader weakening in the Chinese yuan, which hit a four-month low of 7.3192 against the dollar amid U.S. trade tensions. As two of Asia's export powerhouses, India and China often see their currencies move in tandem, with the offshore yuan's 0.2% drop on Thursday dragging down regional peers. Against the yuan, the rupee has depreciated 3.9% since April, providing some competitive edge for Indian exporters but widening India's already ballooning trade deficit with Beijing to $85 billion last year.

Financial analysts called the US tariffs are a “double whammy” as they will directly hit export earnings while fuelling capital outflows and dollar demand.

The 50% duties, the highest levied by Washington on any Asian trading partner, target labour-intensive industries like textiles, gems and jewellery, leather goods, marine products, and chemicals—accounting for 55% of India's $87 billion in U.S.-bound exports. Exemptions for pharmaceuticals, semiconductors, energy, and critical minerals offer some relief, preserving India's role in U.S. supply chains for generics (which supply 50% of the American market) and electronics.

Yet, the blow to non-exempt sectors is severe. India's textile industry, employing 45 million workers and contributing 2% to GDP, faces a 30% cost disadvantage against rivals like Bangladesh and Vietnam, which endure lower U.S. tariffs of 20%. Order books have frozen, with exporters warning of up to 70% shipment drops and 2 million job losses in the near term if duties persist, according to several news reports.

Gems and jewellery, where the U.S. absorbs 33% of exports worth $37.7 billion annually, could see revenues fall by $4-5 billion, hammering small businesses in Gujarat and Maharashtra. "This is akin to a trade embargo," said Ajay Srivastava, founder of the highly-respected Global Trade Research Initiative said in the media. "India's $434 billion export engine risks stalling, with U.S. shipments potentially down 43%."

The rupee's slide exacerbates these pressures. While depreciation theoretically boosts export competitiveness by making Indian goods cheaper abroad, the tariff wall neutralizes much of that gain. Importers, scrambling for dollars amid panic buying, have driven the currency lower, with foreign portfolio investors (FPIs) offloading $16 billion in Indian equities year-to-date. This has depleted forex reserves to $682 billion from a peak of $704 billion, limiting the Reserve Bank of India's (RBI) intervention room.

Against the yuan, the rupee's relative weakness—now at around 12.15 rupees per yuan—could help Indian manufacturers undercut Chinese competitors in third markets like Europe and Africa. But it also inflates the cost of Chinese imports, which dominate India's $100 billion annual purchases from Beijing, widening the bilateral deficit and stoking domestic inflation.

Inflation risks mount as oil, imports bite

The rupee's 4.44% year-to-date drop against the dollar has already fuelled imported inflation, with crude oil—80% of which India imports—now costing an extra 5-7% in local terms. Brent crude hovered at $76.1 per barrel on Friday, up 0.3%, pushing fuel and transport costs higher and rippling through food and manufacturing prices. Retail inflation, already at 6.21% in October, could breach the RBI's 2-6% target band, forcing potential rate hikes despite a slowing economy.

Analysts point out that combined with tariffs, rising inflation could erode consumer spending, which drives 60% of India’s GDP. External debt servicing for India's $620 billion foreign liabilities will also rise, straining corporates and the government.

On the flip side, remittances from 18 million Indian expatriates—worth $100 billion annually—gain value, providing a buffer. Export-oriented sectors like IT and pharma, less exposed to tariffs, stand to benefit from the weaker rupee, with earnings up 5-10% in dollar terms.

RBI steps in, but long-term fixes needed

The RBI intervened aggressively on Friday, selling dollars through state-run banks to cap the rupee's fall below 88.50, traders said. Officials have signalled a "calibrated" approach, tolerating gradual depreciation to maintain competitiveness without sparking volatility.

India's response has been diplomatic rather than retaliatory. Prime Minister Narendra Modi's government condemned the tariffs as "unfair and unreasonable," vowing to protect national interests while pursuing a bilateral trade deal to double commerce to $500 billion by 2030. A $28 billion stimulus package over six years targets exporters with easier loans, market diversification, and MSME support. Efforts to expedite free trade agreements with the EU, UK, and Peru aim to reroute shipments away from the U.S.

Geopolitically, the tariffs strain U.S.-India ties, forged over decades to counter China. New Delhi has deepened engagement with Moscow—Russian oil now meets 40% of needs—and Beijing via the Shanghai Cooperation Organisation summit. "This could push India closer to Russia and China, eroding strategic trust with Washington," said a senior Indian trade official. Prime Ministe Modi, on a visit to Japan, will head to China from there for the SCO Summit. He is expected to meet both Chinese president Xi as well as the Russian president, Vladimir Putin, on the sidelines of the summit.

As global trade frays under Trump's protectionism, India's currency resilience will test its economic mettle. With growth projected at 6.4% for 2026 by the IMF—now at risk—the rupee's fate hinges on swift negotiations and policy agility.