The rupee sank to a record low of 87.29 on Monday after US President Donald Trump slapped tariffs on imports from America’s three biggest trading partners — Mexico, Canada and China — spooking global markets that have been on edge since he returned to the White House late last month.
Asian currencies too slumped as the dollar rallied after Trump announced 25 per cent tariffs on goods from Mexico and Canada, and 10 per cent on imports from China.
Late at night, President Claudia Sheinbaum of Mexico struck a deal with the Trump administration to delay the stiff tariffs by a month as the two countries reached a series of agreements on border security. The tariffs had earlier been meant to take effect on Tuesday.
Panic gripped markets amid talk that the US trading partners would retaliate with similar levies against a range of exports from the US, with the automotive industry likely to bear the brunt of the backlash.
Reports suggested that Trump had spoken with Canadian Prime Minister Justin Trudeau on Monday morning in what could lead to a last-minute deal to stave off the tit-for-tat tariffs. However, the US President gave no sign that he would back down even though the two leaders were scheduled to speak again later in the day.
Trump has warned that tariffs may also be imposed against the European Union. The EU has reportedly said it would “respond firmly” if additional duties are imposed on its products.
At Mumbai’s inter-bank forex market, the rupee ended a torrid day of trading at 87.18 against Saturday’s close of 86.62. The RBI appeared to hold its firepower and did not intervene to prop up the floundering rupee.
In Delhi, finance secretary Tuhin Kanta Pandey said there was no need to be overly concerned about the rupee’s value.
“There is no concern about the value of the rupee. The volatility in the rupee is being managed by the Reserve Bank of India,” Pandey told reporters. He added that the domestic unit was in a “free-float” mode, which meant that the authorities were not looking to defend a particular exchange value.
The central bank has intervened only intermittently in the market over the past year and has often said that it will step in only if there are wild swings in currency trades.
The markets fear that Trump’s belligerent stand on tariffs will spark an outflow of dollars from emerging markets, including India. The money is expected to flow into US treasuries, hurting both equity and debt asset values in these markets.
The stock markets also felt the heat with the bellwether Sensex tumbling nearly 750 points at one stage to an intra-day low of 76,756.09. It recovered some lost ground in the last few hours of trading and closed at 77,186.74, recording a fall of 319.22 points, or 0.41 per cent.
The US threat of levies on Canada, Mexico and China saw the Dollar Index (DXY) — popularly known as the Dixie, which is a weighted geometric mean of the dollar’s value against six free-float global currencies — hitting the day’s high of 109.88.
The DXY was trading at 109.25 — a rise of almost 0.81 per cent at the time of this report. The DXY gauges the dollar’s strength against the euro, Japanese yen, pound sterling, Canadian dollar, Swedish krona and the Swiss franc.
The offshore Chinese yuan was trading 0.4 per cent lower against the US unit at 7.345 while the euro reportedly fell to a two-year low of $1.0125.
Global stock markets turned turbulent with Germany’s DAX trading lower by 1.66 per cent, while London’s FTSE dipped by 1.3 per cent and the CAC — the benchmark French index — fell 1.54 per cent. In Asia, the Nikkei was down 2.66 per cent and Australia’s ASX 200 by 1.79 per cent.
Given the dollar’s strength, forex circles do not rule out the possibility of the rupee breaching the 88 mark over the next few months. In the immediate term, it is likely to tumble to around 87.50, though much will depend on whether the RBI intervenes by pumping in dollars.
“The next key support is at 87.45, while any short-term recovery may face resistance near 86.80. The rupee’s trajectory will remain highly sensitive to further US policy announcements and global trade developments,” said Jateen Trivedi, VP Research Analyst, Commodity and Currency, LKP Securities.
Anuj Choudhary, research analyst at Mirae Asset Sharekhan, felt that the rupee would trade with a negative bias on strong US dollar and Foreign Institutional Investor (FII) outflows and a weak trend in the domestic markets.
Provisional data from the stock exchanges showed FIIs selling stocks worth ₹3,858 crore in Monday’s trade. However, domestic institutions were net buyers to the tune of ₹2,708 crore, acting as a counter-weight to stem the fall.