India’s rupee has emerged as one of the worst-performing currencies globally in 2025, sliding approximately 6% against the U.S. dollar amid widening trade tensions with Washington. The currency hit a record low of 91.075 per dollar, as punitive 50% U.S. tariffs, a growing trade deficit, and significant investment outflows weighed on the market.
Trade Dispute Keeps Rupee Under Pressure
The ongoing U.S.-India trade negotiations remain a key overhang for Indian assets. Investors are reluctant to increase exposure until a formal trade deal is finalized. Citi data shows the rupee’s real effective exchange rate—measured against a basket of trading-partner currencies—is at 96, its lowest in over a decade, well below the ten-year average of 103.
Vivek Rajpal, Asia macro strategist at JB Drax Honore, said:
“The market’s patience is running thin. Months of trade talks have yielded no deal or tariff relief, keeping pressure on the rupee.”
India and the U.S. have held extended negotiations throughout 2025, with India’s Chief Economic Advisor projecting an agreement by March 2026. However, with other Asian economies securing moratoriums or agreements with the U.S., India remains particularly exposed, leaving the rupee as the shock absorber.
Economic Implications of a Weak Rupee
A weaker currency can soften the impact of U.S. tariffs by lowering export prices in dollars. Yet, economists argue that even more depreciation may be required to offset the 50% tariff burden, combined with persistent trade deficits and portfolio outflows.
HSBC analysts highlight that while Indian equities benefit from improving valuations, the rupee’s sharp depreciation poses risks for dollar-denominated returns. Other major brokerages, including Citi, Goldman Sachs, and JP Morgan, have recently upgraded Indian equities, anticipating a market rebound in 2026, aided by rate cuts and potential stabilization of the rupee.
Global Investor Sentiment
Global investors are cautious, comparing India’s situation to the U.S.-China trade tensions under former President Donald Trump. The Chinese yuan depreciated roughly 12% between March 2018 and May 2020 due to escalating tariffs.
Jitania Kandhari, Deputy CIO at Morgan Stanley Investment Management, commented:
“The rupee may need to continue weakening if U.S. tariffs remain in place, similar to the experience of the yuan during the Trump administration.”
While depreciation enhances export competitiveness, it creates a dilemma for foreign investors with dollar-linked portfolios. Kunjal Gala, Head of Global Emerging Markets at Federated Hermes, added:
“A depreciating rupee improves Indian export competitiveness but poses challenges for global investors indexed to the dollar.”
Indian Equity Market Performance
India’s Nifty 50 index has risen about 10% in 2025, lagging behind the MSCI Emerging Market Index (+26%) and MSCI China Index (+30%) in dollar terms. Sectors like banking and IT outsourcing have underperformed, partially due to the lack of clear AI-related growth opportunities in India compared to peers.
Money managers have withdrawn a record $18 billion from Indian equities this year, reflecting lingering caution despite attractive valuations. Analysts note that investor confidence is contingent upon progress in U.S.-India trade talks, which will dictate the rupee’s trajectory and broader market sentiment.
Conclusion
India’s trade impasse with the U.S. continues to weigh heavily on the rupee, making it one of the weakest emerging market currencies in 2025. While a weaker rupee may support export competitiveness and nominal GDP growth, it also erodes dollar-denominated returns, creating challenges for global investors.
Until a trade agreement with Washington is finalized, the rupee is likely to remain under pressure, with investors balancing the allure of cheap assets against the risks of ongoing geopolitical and trade uncertainty.
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