Rupee's Rocky Road: Navigating Tariffs and Investor Woes

The Indian rupee is expected to fluctuated between 87.5 and 88.5 against the US dollar in the coming weeks, a report by Bank of Baroda suggests. The bank believes that while immediate challenges are present, strong macroeconomic fundamentals will bolster the rupee in the long term.

The currency hit a record low in August 2025 amid newly imposed US tariffs, month-end importer demand, and persistent foreign portfolio investor outflows from the domestic equity market. These factors led to a 0.7 percent decline in the rupee for the month, compounded by a generally weaker dollar, the report notes.

Despite hopes for recovery, the near-term forecast remains cautious due to ongoing uncertainties around tariffs and trade negotiations. The Reserve Bank of India (RBI) is projected to step in only to mitigate extreme exchange rate volatility, displaying a tolerance for a weaker currency, according to the bank's document.

The rupee's recent dip past 88 per dollar signifies a weakening investor confidence, driven largely by tariff uncertainty. The US market, being a major recipient of India's exports, complicates the growth outlook under a 50 percent tariff regime, underlining the psychological drag on investor sentiment.

Nonetheless, the report also highlights RBI's limited intervention in the forex market, maintaining that the central bank is poised to ensure the currency's decline remains gradual and orderly. It anticipates the rupee to stay within the predicted range of 87.5-88.5 per dollar, eventually stabilizing thanks to India's robust economic indicators.

(With inputs from agencies.)