Rupee Hits Record Low Amid Tariff Tensions: Why Is The RBI Holding Back?

The Indian rupee’s recently slid to record lows against the U.S. dollar and has gone beyond the 88 mark. The RBI appears to be behaving more like a spectator than a regulator in managing the rupee depreciation. 

This article explores the implications of a weakening rupee on trade and inflation, examines how depreciation can act as a tool to boost exports, reviews RBI mechanisms to control the rupee’s value, and highlights related emerging issues from trade tensions.

Tariff tensions push rupee to record low: RBI as Spectator, Not Regulator

The Indian rupee has been steadily depreciating, reaching an all-time low near ₹88–89 against the U.S. dollar. Notably, it breached the ₹88 mark for the first time ever while the US was punishing the nation with a 50% tariff.

Although the RBI intervened, its presence is not to use the veto, but to abstain from voting. This statement means that, although the RBI has sold dollars through state-run banks or in the NDF market, but is not taking a strong action to put a full stop to this currency depreciation.

What Will Be the Impact of the Decreasing Value of Indian Rupee Compared to US Dollar?

Below is the daily opening and closing USD–INR rates from 25 to 31 August 2025, illustrating the rupee’s depreciation trend.
 

Data derived from Investing.com and Exchangerates.org.uk.

The rupee began the period hugging the high ₹87 range but surged past ₹88 by late August. The sustained weakness indicates strong downward pressure on the currency.

How Can This Depreciating Value Become a Weapon to Tackle Slumping Indian Exports?

A weaker rupee can act like a hidden subsidy for exporters by making Indian goods cheaper internationally. Although U.S. tariffs on Indian products have climbed to 50%, depreciation helps offset this burden. For example, analysts note rupee weakness could cushion exporters, improving competitiveness despite tariff headwinds.

Moreover, depreciation against other currencies, like the yuan, further strengthens India’s export position in overlapping sectors such as textiles, chemicals, and engineering goods.

However, this is not a cure-all. Firms reliant on imported inputs face rising costs. Still, overall, depreciation provides crucial relief to SMEs and labour-intensive exporters coping with punitive tariffs.

How Does RBI Regulate the Value of the Indian Rupee in the Forex Market?

The RBI has several levers to manage rupee volatility:

1. Forex Reserves (US Dollar Pool): With over $690 billion in reserves, the RBI has ample firepower to sell dollars and support the rupee when needed. That capability gives it the flexibility to allow a gradual, rather than sudden, depreciation.
    
2. Intervention in Markets: The central bank has stepped in via:
    
   • State-run banks are conducting dollar sales (e.g., in April, they sold $3.6 billion) to stabilise the exchange rate.
      
   • Resuming operations in the non-deliverable forwards (NDF) market to temper speculative bets and contain volatility.
      
3. Monetary Policy: While repo rates affect currency indirectly, the RBI has held rates stable amid tariff uncertainties to avoid adding to volatility.
    

Together, these tools form a strategy that balances support with allowing market-driven corrections, hence the sense that RBI is “holding back.”

Export Competitiveness vs. Rising Inflation: Impact of Depreciating Rupee

While a weaker rupee boosts exports, it also raises the cost of imports, particularly oil and electronics, adding inflationary pressure. Rising import expenses can widen the trade deficit and dampen corporate profitability and consumer sentiment.

Market Sentiment & Capital Flows On Depreciating Rupee

The rupee’s weakness has fueled capital outflows, as foreign investors exit equities and bonds. Withdrawals have exceeded $13 billion year-to-date, further pressuring the currency. The uncertainty caused by trade tensions and currency volatility may also deter fresh inflows in the near term.

What Will Be the Effect on Exports if the Value of the Rupee Depreciates?

Let’s begin with a simple illustrative example to underline how depreciation helps exporters:

Suppose ₹1 = $0.012 (before depreciation). An Indian exporter sells a product abroad for $100. At this rate, they earn ₹8,333.

If the rupee weakens to ₹1 = $0.011, then the same $100 brings in ₹9,090.

That means exporters receive more rupees per dollar, improving their revenue without raising international prices.

This makes Indian goods cheaper for foreign buyers, boosting demand for exports.

End of Example. This calculation shows how rupee depreciation inherently strengthens Indian exporters’ price competitiveness, particularly vital amid rising trade barriers.

Conclusion

The rupee’s slide to record lows amid tariff tensions highlights global volatility and the RBI’s measured response. While depreciation aids exporters by offsetting tariffs and improving competitiveness, costs of imports climb, inflation risks rise, and capital outflows pose challenges. 

The RBI, armed with substantial reserves and intervention tools, appears to be walking a tightrope, managing weakening pressures while preserving economic stability.

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