Diwali: The rupee hits a record low

The Indian rupee fell to a record low of 88.8 to the US dollar as millions celebrated Diwali. Washington's 50 per cent tariffs are the main cause. They have crippled India's exports and driven foreign portfolio investors out of the market in large numbers.

The duties were built in two steps. A 25 per cent reciprocal tariff on Indian goods took effect in early August, and a further 25 per cent penalty, imposed because India kept buying Russian oil, followed at the end of the month. The combined rate puts India among the most heavily taxed of America's trading partners, well above rivals such as Vietnam and Bangladesh that compete for the same orders in clothing and other labour-intensive goods.

Exports fall, oil bills don't

The 50 per cent tariff on Indian goods wiped out export orders for textiles, pharmaceuticals and the diamond cutters of Surat. Export earnings fell while the dollar bill for imported petroleum stayed high, and the trade deficit widened to levels that cannot last. Foreign institutional investors sold Indian equities faster than the Reserve Bank of India could offset from its foreign exchange reserves.

The mechanism is a squeeze on both sides of the external account. On the current account, fewer dollars come in from goods exports while India, which imports most of the crude oil it uses, must keep paying for fuel. On the capital account, foreign fund managers who had been drawn by India's growth story have been selling shares and taking their money home, converting rupees back into dollars as they go. Each sale adds to the supply of rupees in the market at a time when fewer exporters are selling dollars to buy them.

How the central bank has responded

The Reserve Bank of India has chosen to slow the fall rather than stop it. It holds one of the largest stocks of foreign-exchange reserves in the world, and it has sold dollars on bad days to smooth the decline and punish speculators, as it did in the middle of this month. It has not tried to defend a particular level, and with inflation low and its policy rate at 5.5 per cent after cuts earlier in the year, it has room to let the currency take some of the strain. A cheaper rupee partly offsets the tariff for exporters selling to other markets.

The government has added some support at home. It cut the goods and services tax on a wide range of everyday products in September, which should help domestic demand make up for some of the lost export orders.

What 2013 taught

India has been here before. In the summer of 2013, when the Federal Reserve signalled that it would slow its bond purchases, foreign money fled emerging markets and the rupee fell to what was then a record low. India was grouped with Brazil, Indonesia, South Africa and Turkey as one of the fragile economies with large current-account deficits. The new governor of the central bank, Raghuram Rajan, stemmed the slide partly by offering banks a cheap way to swap dollar deposits raised from Indians abroad, which brought in billions of dollars within weeks. The lesson was that a credible, targeted dollar inflow can turn sentiment faster than rate rises.

The circumstances now are different in one important respect. India's current-account deficit is much smaller than it was then, thanks to large exports of services, and its reserves are far bigger. The pressure this time comes more from a single trade dispute than from a broad loss of confidence in its external finances, which also means a trade deal could reverse it quickly.

Dollar debts get heavier

With the rupee near 89, Indian conglomerates that borrowed heavily in offshore dollar bond markets will find refinancing harder. Each dollar of external debt now takes far more rupees of cash flow to service, and interest coverage ratios are shrinking.

Not everyone loses. India's large information-technology services companies earn most of their revenue in dollars and are not subject to tariffs on goods, so a weaker rupee lifts their margins, though the new $100,000 fee on American H-1B visas for new applicants is a blow to their business model. Families receiving remittances from relatives abroad, a large flow in a country that is the world's biggest recipient of them, get more rupees for each dollar sent home. The losers are importers, oil refiners and airlines paying for fuel in dollars, and companies that borrowed abroad without hedging.

What could turn it

The strongest argument against a continued slide is that a trade deal is within reach. Negotiators from both sides have kept talking, and the president has claimed that India's prime minister assured him India would stop buying Russian oil, which would remove the reason for the extra 25 per cent penalty. New Delhi has not confirmed that. A deal that brought the tariff down to the level faced by India's Asian competitors would likely produce a sharp rally in the rupee as foreign investors returned.

The signals to watch are progress in the trade talks, India's monthly trade and oil-import figures, foreign portfolio flows, and the central bank's reserve data, which show how heavily it is intervening. Diwali 2025 brought Mumbai little cheer. The rupee's slide shows how exposed emerging-market balance sheets are to American tariffs, and for as long as the duties stay, Indian companies with dollar debts will feel the squeeze. Without a deal before the end of the year, the rupee is likely to test new lows and unhedged borrowers will carry the cost; with one, much of this year's fall could reverse within weeks.