Rupee Hits Record Low: How US Tariffs and Foreign Outflows Crushed Asia's Worst Currency
- Tariff Shock: The rupee has collapsed to record lows due to punitive 50% US tariffs and a secondary 25% penalty on Russian trade, shattering hopes for a preferential US-India trade pact
- RBI's Strategic Pivot: Under new leadership, the central bank has shifted to a "hands-off" strategy, allowing the currency to slide to conserve reserves, a move validated by the IMF’s recent reclassification of India’s exchange regime
The Indian rupee has earned the dubious distinction of being Asia’s worst-performing currency in 2025, a year defined by a brutal convergence of geopolitical headwinds and shifting monetary strategy. The currency is currently on track for its steepest annual decline since 2022, a drop that evokes memories of the Ukraine invasion shock but is driven by a distinctly different set of pressures. While high oil prices broke the rupee three years ago, 2025’s collapse is an "American-made" crisis, fueled by aggressive US tariffs, a strategic retreat by the Reserve Bank of India (RBI), and a massive exodus of foreign capital.
The primary catalyst for this year’s rout was the surprise economic offensive launched by President Donald Trump in July. After months of optimism that India would secure a preferential trade deal to replace China as a manufacturing hub, the White House pivoted sharply. Trump imposed a punishing 50% tariff on most Indian exports—the highest rate levied on any Asian nation—and added a "secondary" 25% penalty specifically targeting India’s purchase of Russian energy and weapons. This policy shattered New Delhi’s hopes for a "friend-shoring" bonus and sent the rupee spiraling past 88 per dollar. The situation worsened in September with reports of a potential hike in H-1B visa fees to $100,000, a move that threatens the Indian IT sector, a critical source of foreign exchange.
Compounding this external shock is a significant shift in the RBI’s defense strategy. Under its new Governor, Sanjay Malhotra, who took charge in late 2024, the central bank has moved away from its traditional "defense at all costs" approach. While the RBI has spent an estimated $32.8 billion in reserves since July to smooth volatility, it has largely abandoned defending specific levels. This "hands-off" stance was confirmed on November 21, when the central bank allowed the rupee to plunge to a record low of 89.48 without stepping in. The International Monetary Fund (IMF) validated this shift on November 26 by reclassifying India’s exchange regime to a "crawl-like arrangement," acknowledging that the central bank is now permitting gradual depreciation to reflect inflation realities rather than fighting market forces.
This uncertainty has triggered a stampede of foreign investors exiting Indian equities. As of late November, foreign portfolio investors (FPIs) have pulled over $16.3 billion from the Indian market, closing in on the record outflows seen in 2022. Investors are spooked not just by tariffs, but by rich stock valuations and lukewarm corporate earnings that make other emerging markets like Taiwan and South Korea—which are running current account surpluses—look more attractive. Unlike its Asian peers, India runs a persistent current account deficit, meaning it must constantly buy dollars to fund its imports, creating a structural weakness that is easily exploited during times of stress.
Currently, the rupee sits at a dangerous precipice. The market is waiting to see if a long-stalled trade deal with the US can be salvaged before year-end. There are signs of a tactical pivot from New Delhi, with Indian refiners reportedly reducing Russian oil purchases in favor of US crude to appease Washington. However, if these diplomatic overtures fail to lower the tariff wall, the RBI may be forced to abandon its new "hands-off" policy and burn through its $693 billion reserve pile to prevent a disorderly crash past the psychological 90-per-dollar mark.