The Indian Rupee gained slightly on Wednesday, supported by the central bank's decision to maintain its key interest rate, although anticipated increases in tariffs on exports to the United States are expected to weigh on the currency.
The Rupee closed at 87.7325 against the US Dollar, marking a 0.1% rise from Tuesday’s 87.8000, Reuters news agency reports.
The Reserve Bank of India's (RBI) six-member rate-setting committee unanimously decided to keep the repo rate steady at 5.50% and maintain a “neutral” policy stance, despite economists anticipating significant US tariffs on Indian goods and low inflation that could allow for some further rate cuts.
Starting on Friday, India will face a 25% tariff on its exports to the US, and President Donald Trump has threatened to impose “very substantial” additional tariffs due to India’s oil imports from Russia.
A trader from a state-owned bank indicated that the Rupee could surpass the 88-level next week due to market reactions to the tariff threat.
The Rupee fell 1.18% against the Dollar in the week ending 1st August, marking its steepest weekly drop in almost three years, and traders suggest it might have reached a new record low if not for interventions by the central bank.
“Downward pressure on Rupee after the 25% tariff also is a likely reason for not cutting rates,” stated Amit Bivalkar, founder director at Sapient Finserv.
When the RBI lowers the repo rate, it can lead to a weaker currency because foreign investors might move their funds to markets offering higher returns.
Traders and analysts say that persistent foreign outflows have contributed to the Rupee’s weak performance this year.
In addition, the RBI governor stated in his monetary policy announcement that India experienced net outflows of $800 million from the start of the financial year in April through to 31st July, primarily driven by outflows in the debt segment.