Track rupee-tariff, and Russian oil, fx

The rupee is facing intense pressure from Donald Trump's latest additional 25% tariff announcement for buying Russian oil, and RBI is understood to have stepped up intervention in the forex market. The Indian currency has performed poorly against a basket of Asian counterparts because of the varied incidence of retaliatory US tariffs. Demand for dollars is climbing on account of crude oil imports and capital flight from Indian equities. Yet, the international price of oil and benchmark stock indices are relatively stable after the US tariff imposition, which limits descent of the rupee. The currency is fairly valued in terms of real effective exchange rate, and there is room for depreciation in order to counteract the altered dynamics of international trade in goods.

India's approach to exchange rate management is guided by the principle of addressing volatility, rather than targeting any specific level for the rupee. This requires a lower dependence on forex reserves to defend the rupee. To the extent that Trump tariffs could slow India's growth, rupee depreciation is an inevitable outcome. This can be managed - magnified or dampened - to suit India's export competitiveness. But such effects are likely to be incremental given the economy's reliance on services exports and remittances. Allowing the rupee to find its own level would probably be the policy outcome of choice while the US adjusts to rising inflation.

A slowing US economy has a bearing on global energy demand and capital flows, the proximate causes for rupee movement. Bigger shifts will occur, now that the Trump regime has acted on its intention to stop Indian access to Russian crude oil. The effects will be at two levels. First, the price of oil will be affected if Russian supplies are withdrawn from the market. Second, India will have to pay more in dollars for the oil imports it will need to switch away from Russia. This, however, is a developing situation, with little clarity over Chinese purchases of Russian oil. Watch this space.