Rupee Beset By A Trifecta Of Troubles. Will The Slide To New Lows Continue?

(MENAFN- Live Mint)

Mumbai: The fallout of US President Donald Trump's visa and trade barriers on remittances, combined with relentless foreign selling in the capital markets, could keep the Indian rupee under duress when it is already hovering around all-time lows, according to economists.

Money sent home by Indians working in the US and the country's export income will come under pressure because of Trump's endless arm-twisting of the world's fourth-largest economy, be it through sudden and hefty fees on H-1B visas or a 50% tariff, including a 25% additional levy for buying Russian oil, experts said. That will hurt the current account balance–the difference between a country's exports and imports of goods and services, along with transfer of funds.

“A majority of the net services export income comes from IT services that India provides," according to Madan Sabnavis, chief economist, Bank of Baroda.“There are also remittances that those employed abroad do to send money to India, and if IT companies are deterred from sending Indians abroad to work on these visas, the remittances can drop."

Top source of remittances

The US is the top source of remittances for India, accounting for about 27.7% of such inflows in the year through March, according to data by the Reserve Bank of India (RBI). It was followed by the United Arab Emirates (19.2%) and the UK (10.8%). Remittances rose to $33.2 billion in the June quarter from $28.6 billion a year earlier.

Trump has made several flip-flops, but India has been at the receiving end. While the two countries negotiate a bilateral trade deal, these moves are still expected to hurt the local economy. Estimates by India's chief economic advisor V Anantha Nageswaran peg the impact at 50 basis points of India's GDP growth in FY26, but retained the forecast at 6.3-6.8%.

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However, economists at CareEdge Ratings estimate that if 50% US tariffs persist, India's FY26 gross domestic product (GDP) growth could be around 6%, compared with its base case of 6.5%, which assumes tariffs settle at 15-20%.

The Indian rupee has depreciated from 85.5 against the dollar since Trump announced tariffs on a host of nations in April to 88.7 on 26 September.

Services exports to take a hit

India's net services receipts increased to $47.9 billion in the June quarter against $39.7 billion a year earlier, showed RBI data. Software services, the biggest component of services exports, contributed $41.5 billion, up from $37.4 billion in the first quarter of the previous fiscal.

If outsourcing comes under threat, then these net services exports could decline, according to Sabnavis.“While there is no immediate problem on the current account side, there could be pressure that will manifest in a year from now, which will exert pressure on the rupee."

India's current account deficit (CAD) was 0.2% of the GDP in FY26's first quarter to June, against a surplus of 1.3% in the previous three months. The CAD was 0.6% in FY25.

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The impact of Trump's actions is hard to quantify as of now, but the impact of the H1-B visa has queered the pitch on the CAD front, according to a fixed-income and trading head of a private bank.

“The capital account was already under pressure from relentless FPI (foreign portfolio investor) selling because of our overvalued equity markets, and the worry is this is likely to continue until markets don't correct, the banker said, adding that the rupee could slip to 89-89.25 in the interim, with RBI intervening at that level.

Foreign fund selloff

Foreign investors have net sold $16.9 billion in the Indian equity market so far in 2025 compared with a net purchase of $124 million in 2024, showed data from NSDL. They were net buyers of $4.7 billion worth of debt instruments. When mutual fund investments are included, overseas investors have net sold $10.7 billion worth of investments so far this year, compared with a net buying of $20 billion in 2024.

“These concerns are weighing on FPI flows," CareEdge Ratings said in its 24 September note.

August saw the highest net FPI outflows in four months at $2.3 billion (equity and debt combined), while September (as of 23 September) recorded marginal net inflows of $0.4 billion, the rating firm said. However, it warned that the recent announcement of a sharp increase in H-1B visa fees may weigh on sentiment.

Also Read | India's current account deficit narrows in Q1. Is it sustainable

DK Joshi, chief economist at Crisil, said the base case for the CAD was 1% of GDP in FY26, higher than 0.6% in the previous fiscal. "While others tended to be more optimistic, we were conservative on the CAD, which we see widening because of the geopolitical factors at play, which we took into account to arrive at the 1% figure ."

Sujan Hajra, chief economist at Anand Rathi group, was more sanguine. He expects the CAD to remain within the 1% of GDP bracket in FY26.

"Some of the mitigating factors include low oil price and the import of oil accounting for less than 30% of our overall import, which stood at 40% when oil crossed the three-figure mark in 2007-08," Hajra said.“Another factor is that the H-1B issue will lead to an optimum mix of onshoring-offshoring and FTAs (free-trade agreements) with 12 countries (including the UK, the UAE, Australia, Switzerland, etc) means exports through third countries could somewhat ameliorate the 70% hit to overall merchandise exports of $80-81 billion to the US."

A weaker currency could result in "import substitution", easing pressure on the rupee, he said. Worker remittances of more than $130 billion in FY25 into the country, along with forex reserves of over $700 billion, preclude the risk of a run on the local unit.

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