Rupee fall may be transient, conflict may amplify impact

Rupee's 88-paise drop on Thursday marked its steepest single-day fall in more than 2.5 years

- Rhik Kundu

Economists expect the impact of the Indian rupee's sharp drop against the US dollar to be short-lived, despite concerns over inflation, foreign investment, and fiscal stability, as escalating India-Pakistan tensions, a strengthening US dollar, and a market sell-off drive the currency's decline. At the same time, they warned that things could take a turn for the worse if the conflict with Pakistan lingers.

The rupee's 88-paise drop on Thursday marked its steepest one-day fall in more than two-and-a-half years. On Friday, it opened 0.2% lower at 85.85 against the US dollar, and then depreciated 15 paise to 85.869 in early trade. In comparison, the rupee stood at 83.51 against the dollar a year ago (9 May 2024), according to Bloomberg data.

"The rupee is echoing the turmoil in the political space, as well as the limited gains made by the dollar," said Madan Sabnavis, chief economist at the Bank of Baroda. "This will continue until the situation stabilises. The dollar can strengthen as agreements are reached on tariffs with other countries."