The Rupee's Slide: Navigating Asia's Currency Crosscurrents Amid U.S.-China Tensions

As Asian currencies brace for turbulence in May 2025, the Indian rupee is poised to open weaker, dragged down by a broader selloff in regional currencies led by the Chinese yuan. The yuan’s depreciation—projected to hit 7.45 by late summer—has reignited concerns about trade frictions, Fed policy uncertainty, and oil prices, all of which amplify risks for emerging markets like India.

The yuan’s decline is no isolated event. U.S. tariffs averaging 245% on key Chinese imports and geopolitical tensions have eroded demand for the currency, even as China’s central bank injects fiscal stimulus through RMB 500 billion in Medium-Term Lending Facility (MLF) injections. Meanwhile, the U.S. dollar’s retreat—driven by Fed rate-cut expectations—has complicated the calculus for Asian currencies.

The Yuan’s Dilemma: A Preview for the Rupee

China’s currency faces a dual challenge: external pressures from trade wars and internal struggles with deflation and a stagnant property market. The People’s Bank of China (PBOC) has kept its one-year LPR rate at 3.1% for six months, signaling a reluctance to weaken the currency further. Yet, Goldman Sachs forecasts the yuan could trade between 7.4–7.6 by year-end, with risks skewed toward depreciation if tariffs escalate.

For the rupee, the parallels are stark. India’s current account deficit—widened by $200 billion in oil imports—has left it vulnerable to capital outflows. The Reserve Bank of India (RBI) faces a tough balancing act: easing rates to support growth while defending the currency.

Asia’s Currency Crossroads

Beyond China and India, Asian currencies are caught in a tug-of-war between global and local forces:
- Japanese yen: The yen’s recent rebound to 142.85 against the dollar hinges on the Bank of Japan’s accommodative stance and U.S. rate cuts. MUFG predicts it could fall to 138.00 by early 2026 if Fed easing proceeds.
- South Korean won: A 1,426.2 USD/KRW rate masks export-driven pressures, as Seoul’s tech-heavy economy grapples with U.S.-China trade disruptions.
- Malaysian ringgit and Thai baht: Both currencies remain stable but face risks tied to commodity prices and tourism recovery.

The Fed’s Role in Asia’s Fate

The U.S. Federal Reserve’s pivot is the wildcard. A May 7 FOMC meeting could signal rate cuts as early as July, weakening the dollar and easing pressure on Asian currencies. However, if inflation resurges—driven by oil prices or supply-chain bottlenecks—the Fed could delay easing, prolonging the rupee’s slump.

Investor Playbook: Navigating the Crosscurrents

1. Short-term caution: The rupee could hit 85.00 by mid-2025, requiring hedging for importers and investors.
2. Medium-term optimism: If the Fed cuts rates and trade tensions ease, the rupee may stabilize at 83.50 by early 2026.
3. Diversify risks: Pair exposure to Asian currencies with safe havens like the yen or U.S. Treasuries.

Conclusion: Riding the Waves of Policy and Trade

The rupee’s near-term weakness is inevitable, but its long-term trajectory hinges on two critical factors: the resolution of U.S.-China trade disputes and the Fed’s next move. With 75% of analysts surveyed by Reuters predicting a Fed rate cut by year-end, the rupee’s rebound may follow—but only if India can manage its fiscal and external deficits.

For now, the yuan’s decline serves as a cautionary tale: In an era of geopolitical fragmentation, no currency is an island. Investors must stay agile, watching USD/CNY rates and oil prices as leading indicators of Asia’s next move.