Rupee at a Record Low and US Tariffs: Who Wins in Indian Stocks

Watch it play outA dollar buys 16% more rupees than it did two and a half years ago

Two and a half years ago, one dollar bought ₹83.54.

Late last year it closed above 90 for the first time, and ended the year at 89.87.

Strikes on Iran shut the Strait of Hormuz and Brent went above $100. The rupee hit a record close of 94.85.

Three weeks later it touched an intraday low of 96.96 per dollar.

After the central bank's latest rate hike it trades around 96.8, about 16% more rupees per dollar.

Replay

Is this a trade problem or a money-flow problem?

Mostly money flows. In the latest quarter, India's current account deficit (the gap between everything it earns from abroad and everything it pays) was only $4.2 billion, or 0.5% of GDP. A huge goods deficit was almost entirely covered by software and services exports and by money Indians working abroad send home.

Services and remittances covered almost all of an $86 billion goods gap

Goods trade deficit−$86.1B

Net services+$51.6B= −$34.5B

Remittances+$42.9B= $8.4B

Investment income paid out−$10.5B= −$2.1B

Other−$2.1B= −$4.2B

Current account−$4.2B

The pressure came from the capital account. Foreign portfolio investors (FPIs: overseas funds that buy listed Indian shares and bonds) pulled a net $9.6 billion out in that quarter alone. So far this year, net selling of Indian equities is close to $30 billion, after a then-record of about $18 billion last year. Every foreign fund that sells has to turn rupees back into dollars. US 10-year Treasury yields at 5.34% this month gave that money somewhere attractive to go. The same pressure from capital flows and a strong dollar hit other emerging markets too: the Philippine peso and Indonesian rupiah set record lows on the same day as the rupee's record close.

What happened to the 50% US tariff on Indian goods?

A little over a year ago, Washington set a 25% "reciprocal" tariff on most Indian goods. Three weeks later it added another 25% as a penalty for India's purchases of Russian oil. The Global Trade Research Initiative (GTRI), a Delhi think tank, said that made India "one of the most heavily taxed U.S. trading partners", above China at 30% and Vietnam at 20%.

Make a guess

Before the tariffs, India shipped $8.8 billion of goods to the US in a single month. Four months later, in the first full month of the 50% tariff, how far had monthly exports fallen?

Tap your guess

Under 15%Your guess15% to 30%Your guessMore than 30%Your guess

01234567890123456789%Fall in monthly exports to the US

Spot on.Close, a little low.Close, a little high.Way off, too low.Way off, too high. It was 38%.

37.5%, from $8.8 billion to $5.5 billion a month. More than $3.3 billion of monthly sales disappeared in four months.

Fall in monthly exports to the US38%

Fall a month earlier14%

Then the tariff unravelled, in three steps:

1. The interim deal. Early this year, President Trump announced a deal cutting the rate to 18%. Four days later the two governments published a framework, and an executive order removed the 25% Russian-oil penalty after India "committed to stop directly or indirectly importing" Russian oil. India said it would buy $500 billion of US goods over five years.
2. The court. Two weeks after the framework, the US Supreme Court ruled 6–3 in Learning Resources v. Trump that the emergency-powers law behind the tariffs does not authorize them. Collection stopped four days later.
3. The replacements. A 10% global surcharge under Section 122 of US trade law ran for its legal maximum of 150 days. When it lapsed over the summer, a 10% duty under Section 301 replaced it. India is one of 17 economies on the 10% tier. Unlike the surcharge, Section 301 duties have no end date.

In 14 months, India's US tariff went from 50% to 10%, but no deal is signed

1. 14 months ago25% reciprocal tariffMost Indian goods
2. 3 weeks later50%Extra 25% for Russian oil
3. 8 months agoInterim framework18% announced; oil penalty removed
4. 2 weeks laterSupreme CourtEmergency tariffs ruled unlawful
5. This summer10% Section 301Replaces 150-day surcharge
6. NowTalks plateauNo final deal

The full trade agreement is stuck. Finance Minister Nirmala Sitharaman now says both sides have "reached a plateau beyond which giving or taking might be very very difficult." The sticking point is the US goods deficit with India, which grew 27.8% last year to $58.42 billion.

Which Indian sectors are exposed to US tariffs, and which are exempt?

At the 50% peak, GTRI worked out the total duty on each of India's main export lines to the US. The rates below include duties that were already in place, which is why several are above 50%.

At the 50% peak, Indian clothing faced US duties above 60%

Knitted apparel ($2.7B)63.9%

Woven apparel ($2.7B)60.3%

Bed linen, towels ($3B)59.0%

Organic chemicals ($2.7B)54.0%

Carpets ($1.2B)52.9%

Gems, jewellery ($10B)52.1%

Auto parts ($2.6B)26.0%

Total US duty at the 50% peak, by sector, with yearly exports to the US in brackets. Shrimp ($2B) faced 50% plus about 10% of existing anti-dumping and countervailing duties.

Auto parts got off lighter because most car and light-truck components were already under a separate 25% national-security tariff (Section 232) rather than the reciprocal stack. Reuters put India's auto-component exports to the US two years ago at $6.6 billion, with about $3 billion of commercial-vehicle and farm-equipment parts facing the full 50%.

The biggest US export lines were the ones the tariff missed

Exposed50% at the peak, 10% now

• Gems and jewellery: $10B
• Textiles and apparel
• Shrimp: $2B
• Chemicals, carpets, machinery

Lost orders last year

ExemptZero or minimal duty

• Smartphones: $10.6B
• Pharmaceuticals: $9.8B
• Petroleum products: $4.1B

Kept selling

Separate rulesSection 232

• Car and light-truck parts: 25%
• Steel and aluminium: 50%
• Patented drugs: generics excluded

Unchanged by the ruling

Today most Indian goods pay their normal US duty plus 10%. CNBC reports that, according to the Indian government, generic medicines and smartphones remain outside that 10%. The rupee also cushions exporters: each dollar of sales converts into 7.7% more rupees than at the start of the year. That offsets much of a 10% tariff, if the exporter passes some of the gain to its US buyer as a lower dollar price.

Does a weak rupee help Indian IT stocks?

In theory, yes. Indian IT companies bill clients in dollars and pay most staff in rupees, so a weaker rupee lifts margins. This year it hasn't mattered. By late last month the Nifty IT index was down more than 21% for the year, against a fall of nearly 13% for the Nifty 50, as investors worried that generative AI will shrink traditional outsourcing work. Tata Consultancy Services (TCS) has lost 35% since the start of the year.

The currency is flattering the reported numbers. Ahead of TCS's latest quarterly results, HDFC Institutional Equities expected sales up 11.1% from a year earlier in rupees, while Emkay Global expected dollar revenue to grow just 0.5% from the previous quarter. Much of the rupee growth is currency translation, not new business.

Check the claimThree rupee claims to check

ClaimA weak rupee is good for Indian IT stocks.Tap to checkMythIt helps margins, but the Nifty IT index fell more than 21% this year while the rupee slid. Fear of AI-driven price cuts outweighed the currency.Flip backClaimIndian goods still face a 50% US tariff.Tap to checkMythThe 50% ended with the Supreme Court ruling early this year. Most goods now pay their normal duty plus 10%.Flip backClaimThe RBI defends a fixed rupee level.Tap to checkMythIt sells dollars to slow the fall and limit volatility, but says it does not target a price or band.Flip back

What about the $100,000 H-1B fee?

A little over a year ago, a presidential proclamation imposed a $100,000 fee on new H-1B visa petitions for workers outside the US, the visa Indian IT firms have long used to staff US projects. A federal court in Massachusetts vacated the fee this year, and the First Circuit later refused to reinstate it. Last month the White House extended the proclamation by another year, so the fight continues in court. With collection blocked, the fee is a legal overhang on US staffing costs, not the main reason IT stocks fell.

Why is pharma the clear winner?

Pharma has everything IT lacks this year: dollar revenue, a tariff exemption for generics, and growing demand at home. By late last month the Nifty Pharma index was up 18.46% for the year. On the day the US started charging a 100% tariff on more patented drugs, qualifying specialty medicines from India were eligible for zero duty, and the index rose while the market fell.

"Rupee weakness leads to better realisations in rupee terms," said G Chokkalingam of Equinomics Research. Pharma, he said, is the only sector benefiting from both domestic demand and a favourable export market.

Pharma is up 18% this year while IT is down more than 21%

Nifty Pharma18.5%

Nifty 50−13.0%

Nifty IT−21.0%

Price change in rupees from the end of last year to late last month. Nifty 50 and Nifty IT are reported as "nearly 13%" and "more than 21%" down.

Who loses when the rupee falls?

Anyone who earns in rupees and pays in dollars.

Oil marketing companies. State-run fuel retailers buy crude in dollars and sell petrol and diesel at prices the government influences. With Brent above $100, their under-recoveries (losses from selling below cost) on fuel and cooking gas approached ₹30,000 crore a month (about $3.1 billion), according to Business Standard. Pump prices went up by ₹3 a litre, the first rise in four years. In the most recent quarter, Hindustan Petroleum (HPCL) lost ₹11,526 crore, Bharat Petroleum ₹3,962 crore and Indian Oil ₹2,661 crore. HPCL's shares were down 21% for the year by late summer.

Companies with dollar liabilities. IndiGo, India's largest airline, pays aircraft leases and maintenance in dollars. Late last year its finance chief said a net exposure of about $9 billion meant a loss of "around ₹900 crore for every rupee's depreciation at the quarter-end".

Find the currency risk

These lines come from IndiGo's results commentary. One shows how a falling rupee alone can wipe out profit. Tap it.

IndiGo, quarterly results a year ago

Revenue up 10.4% to ₹19,600 crore About ₹200 crore gain on hedging ₹3.18 rupee fall in the quarter → about ₹2,900 crore forex loss Net loss of ₹2,582 crore

Tap the phrase you think is the tell.

Spotted it.Not that phrase. The ₹2,900 crore forex loss was larger than the entire ₹2,582 crore net loss. Strip out the currency and the airline would have been profitable that quarter.

• “Revenue up 10.4% to ₹19,600 crore” The business grew. Revenue isn't the problem.
• “About ₹200 crore gain on hedging” Hedges helped, but they cover only part of the exposure.
• “₹3.18 rupee fall in the quarter → about ₹2,900 crore forex loss” Roughly $9 billion of dollar lease and maintenance obligations, revalued at a weaker rupee.
• “Net loss of ₹2,582 crore” Smaller than the currency hit alone.

Explain every phraseHide the other explanations

The pattern repeated last quarter: IndiGo lost ₹238 crore against a ₹2,176 crore profit a year earlier, with fuel costs up about 80% and the rupee more than 11% weaker year on year. The government also raised import duties on gold and silver to 15% from 6% to cut dollar spending on imports.

What does a weaker rupee do to a US investor's Nifty returns?

A foreign investor earns two returns multiplied together: the stock return in rupees, and the change in the rupee's dollar value. Last year the Nifty 50 rose 10.5% in rupees, but the rupee lost 4.7%, so a dollar investor made about 5.3%. So far this year, a 13.5% fall in rupees becomes a 19.7% fall in dollars.

Across last year and this one, the currency tripled a foreign investor's loss

Nifty 50 in rupeesNifty 50 in dollars

−20−101020%0

10.5%5.3%

Last yrNifty 50 in rupees10.5%Nifty 50 in dollars5.3%

−13.5%−19.7%

This yrNifty 50 in rupees−13.5%Nifty 50 in dollars−19.7%

−4.4%−15.4%

Both yrsNifty 50 in rupees−4.4%Nifty 50 in dollars−15.4%

Last yrThis yrBoth yrs

Here is this year's math step by step, for $100 invested at the end of last year:

$100 in the Nifty became about $80, and $6 of the loss was the rupee

End of last year$100.0

Nifty −13.5% in rupees−$13.5= $86.5

Rupee −7.2% vs dollar−$6.2= $80.3

Now$80.3

A domestic investor in Mumbai only sees the first step. That gap explains the split in who is buying. Domestic institutions (DIIs: Indian mutual funds, insurers and pension funds) invested a record $177 billion over the past 24 months, powered by monthly SIPs (systematic investment plans, automatic monthly purchases of mutual funds) of more than ₹30,000 crore a month. Foreigners sold. Try your own assumptions:

Your dollar return depends on two bets, not one

Pick a Nifty return in rupees and a move in the rupee

Nifty return in rupees

−20%−10%0%+10%+20%

Rupee vs dollar

Gains 5%FlatLoses 5%Loses 10%

Return in US dollars−16.0%−20.0%−24.0%−28.0%−5.5%−10.0%−14.5%−19.0%5.0%0.0%−5.0%−10.0%15.5%10.0%4.5%−1.0%26.0%20.0%14.0%8.0%

+3.7%−0.3%−4.3%−8.3%+14.2%+9.7%+5.2%+0.7%+24.7%+19.7%+14.7%+9.7%+35.2%+29.7%+24.2%+18.7%+45.7%+39.7%+33.7%+27.7%above Nifty 50 in dollars, this yearbelow Nifty 50 in dollars, this yearbelow Nifty 50 in dollars, this yearbelow Nifty 50 in dollars, this yearabove Nifty 50 in dollars, this yearabove Nifty 50 in dollars, this yearabove Nifty 50 in dollars, this yearabove Nifty 50 in dollars, this yearabove Nifty 50 in dollars, this yearabove Nifty 50 in dollars, this yearabove Nifty 50 in dollars, this yearabove Nifty 50 in dollars, this yearabove Nifty 50 in dollars, this yearabove Nifty 50 in dollars, this yearabove Nifty 50 in dollars, this yearabove Nifty 50 in dollars, this yearabove Nifty 50 in dollars, this yearabove Nifty 50 in dollars, this yearabove Nifty 50 in dollars, this yearabove Nifty 50 in dollars, this year

Nifty 50 in dollars, this year −19.7%

−28.0%26.0%

A US investor can hedge the currency, but hedging the rupee costs roughly the interest-rate gap between India and the US, and it removes the upside if the rupee recovers. Unhedged, your total return carries the currency bet whether you meant to make it or not.

What is the RBI doing to defend the rupee?

The Reserve Bank of India (RBI) is slowing the fall, not stopping it. Governor Sanjay Malhotra has said the RBI doesn't "target any price levels or any bands." At the latest policy meeting he went further: "By a number of estimates, including the REER, the rupee is not overvalued; it may be undervalued." The REER, or real effective exchange rate, measures the rupee against a basket of trading partners' currencies after adjusting for inflation.

It has still used most of its tools:

• Dollar sales. Reserves fell from a pre-war record of $728.49 billion, set the day before the strikes, to $666.9 billion four months later.
• Curbs on speculation. A month into the war it capped banks' open currency positions at $100 million.
• A deposit window for Indians abroad. It then let banks take foreign-currency deposits from non-resident Indians, called FCNR(B) deposits, at up to 7.4% and swap the dollars with the RBI. They raised nearly $133 billion. Similar windows during the taper tantrum, thirteen years ago, raised about $22.7 billion.
• A rate hike. Finally, the RBI raised its policy (repo) rate by 0.25 percentage points to 5.5%, its first increase in more than three and a half years, and changed its stance to "calibrated tightening." The rupee weakened anyway, to about 96.8.

NRI deposits refilled the reserves, and the RBI is spending them again

600650700750$800BPre-warLowRecoveredPeakLatestRecord $785.7B$747.6BIndia's forex reserves, this yearPre-war$728.5BLow$666.9BRecovered$729.3BPeak$785.7BLatest$747.6B

What could change this view?

Three things. A durable reopening of Hormuz and a fall in crude would ease the dollar demand behind the slide. Falling US yields would make Indian assets competitive again for foreign funds. And a signed trade deal with a rate below 10% would help textiles and jewellery. The risk on the other side is the RBI's own buffer: $38.1 billion of reserves went in the three weeks after the peak, and much of the money it is spending is deposits that will have to be repaid.

Our read

The rupee's fall is a money-flow story, not a trade crisis. The current account deficit is 0.5% of GDP. The pressure comes from record foreign selling, oil above $100 and US yields above 5%, and none of those is under India's control.

The tariff scare is mostly over. India went from 50% to 10%, the same rate as many other countries, though nothing is signed and Section 301 has no end date. Tariffs are no longer the main thing to watch.

For a dollar-based investor, the currency is now as important as stock-picking. Across last year and this one, it turned a 4.4% index loss into a 15.4% loss. Until oil and foreign flows turn, we would assume the rupee keeps drifting weaker and size Indian holdings with that drag built in.

Within the market, own the businesses where the rupee is a tailwind and nothing else is fighting it. Pharma fits: dollar revenue, a generics exemption and domestic growth. IT is cheaper, but AI is a bigger force than the currency. Avoid fuel retailers and companies with large unhedged dollar obligations until crude falls.

Go deeper

• Risk and scenarios: build oil, currency and tariff cases the way the scenario above does, then weight them before you size an Indian position.
• Debt and liquidity: how to find foreign-currency obligations like IndiGo's $9 billion exposure before a quarter-end revaluation finds them for you.
• Pricing power and inflation: why an exporter that can hold its dollar prices keeps the rupee gain, and one that can't hands it to the customer.

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