Rupee Likely to Inch Up, Dollar Drifts Amid US Tariffs Crosswinds

The Indian rupee’s recent resilience against the dollar, despite ongoing US tariff threats, reflects a nuanced interplay of policy adjustments, structural advantages, and global macroeconomic shifts. As Washington delays its 25% tariff threat on Indian imports until July 2025 and the Federal Reserve softens its hawkish stance, the rupee finds itself in a cautiously optimistic position. However, crosscurrents from trade tensions, inflation dynamics, and geopolitical risks ensure volatility remains the norm.

The Tariff Crossroads and Immediate Market Reactions

The U.S. decision to suspend country-specific tariffs on India until July 2025, while maintaining a 10% baseline levy, has provided a temporary reprieve for the rupee. This delay, coupled with the Federal Reserve’s dovish pivot—signaling potential rate cuts—has eased pressure on emerging markets like India. The rupee’s partial rebound to 85.8350 per dollar by mid-April (from a low of 87.28) underscores this stabilization.

However, the threat of a 25% tariff looms large. Should it materialize, Indian exporters in sectors like pharmaceuticals, textiles, and auto components—already grappling with a 26% effective tariff rate—could face margin compression. Yet, the RBI’s April 2025 rate cut to 6% and its accommodative stance have bolstered investor sentiment, .

RBI’s Policy Buffers and Structural Leverage

India’s relatively insulated economy, with exports accounting for just 20% of GDP compared to 87% in Vietnam, grants it unique flexibility. The RBI’s focus on growth over inflation (projected at 3.6% for March 2025) aligns with a strategy of using fiscal and monetary tools to buffer against external shocks.

The central bank’s reduced intervention under Governor Sanjay Malhotra has allowed the rupee to adjust organically, avoiding the distortions seen in 2024. Meanwhile, India’s $1.3 trillion IT services sector—exempt from tariffs—continues to generate dollar inflows, mitigating pressure from goods export headwinds.

Global Crosswinds and the Dollar’s Weakening Momentum

The U.S. dollar’s broader decline, down 4% month-on-month, reflects growing concerns over trade wars and recession risks. Federal Reserve officials, acknowledging tariff-driven economic drag, have hinted at cuts totaling 75 basis points in 2025, . This divergence weakens the dollar while favoring emerging-market currencies like the rupee.

Yet, risks persist. A stronger-than-expected U.S. jobs report or a sudden escalation in trade tensions could reverse the dollar’s drift. Additionally, India’s $15 billion equity outflows since late 2024 and its reliance on oil imports—now at 87%—leave the rupee vulnerable to crude price spikes.

Sectoral Winners and Losers

The IT sector, a linchpin of India’s dollar earnings, remains resilient, with companies like Tata Consultancy Services (TCS) and Infosys likely to outperform despite equity market volatility. .

Conversely, manufacturers in textiles and steel face margin pressures, while auto exports—already under 25% Section 232 tariffs—will see limited direct impact due to low U.S. market penetration. The RBI’s rate cuts, however, may boost domestic consumption, offsetting some export losses.

Conclusion: A Fragile Rally, But Room to Grow

The rupee’s near-term trajectory hinges on three pillars:
1. Diplomatic Resolve: India’s trade negotiations with the U.S. and its ability to secure tariff exemptions for key sectors.
2. Global Liquidity: Fed rate cuts and the dollar’s sustained weakness, which could push the rupee toward 85.50 by mid-2025.
3. Domestic Stability: RBI’s success in balancing growth support with inflation control.

While risks remain—particularly a potential 0.5% GDP hit from tariffs and equity outflows—the rupee’s structural advantages and policy buffers position it to edge higher. Analysts project a year-end rate of 87.30, , suggesting a cautious bullish stance for investors.

In this crosswind environment, the rupee’s ascent will be measured, not meteoric. Yet, for those navigating emerging markets, India’s blend of resilience and reform offers a compelling, if turbulent, opportunity.