The Indian rupee faced significant challenges in 2025, experiencing a sharp decline due to increased tariffs imposed by the United States relative to other emerging economies. This situation has led to a steep depreciation of the rupee against major currencies, such as the euro, yen, and British pound, rendering it the poorest performer among emerging market (EM) currencies this year.
The rupee has depreciated by 2.71% against the US dollar, but losses against other currencies are more pronounced: 18.05% against the euro, 12.88% against the British pound, and 9.87% against the Japanese yen, marking a stark contrast to 2024, when the rupee appreciated by 7.19% against the yen and 2.77% against the euro.
Abhishek Bisen, Head of Fixed Income at Kotak Mutual Fund, attributed the currency’s weakness to the 50% bilateral tariffs imposed by the US on Indian goods. “India exports about 20% of its goods to the US, and the tariffs are significantly higher than those on other nations,” Bisen noted.
Other currencies, including the yen, euro, and pound, have appreciated against the USD this year, with the US Dollar Index depreciating over 10% year-to-date. The expectation of a Fed rate cut contributed further to the dollar’s weakening, allowing the rupee to gain 16 basis points against the dollar ahead of the Federal Open Market Committee (FOMC) meeting, although the rupee lost an additional 25 basis points against the euro during the same period.
Additionally, the rupee’s performance was even less favorable when compared to other emerging market currencies. Excluding struggling outliers like the Argentine peso and the Turkish lira, the Indian rupee was the weakest among stable emerging market peers in 2025. Meanwhile, the Brazilian real and Chinese yuan recorded gains of approximately 15.96% and 2.68%, respectively, while the Indian rupee’s decline of about 2.64% was the largest.
Bisen pointed out that this relative underperformance is mainly due to the higher tariffs from the US. Foreign portfolio investment inflows into India from April to August 2025 amounted to $2.6 billion, significantly lower than the $10.4 billion recorded during the same period the previous year. In contrast, overall FPI inflows into emerging markets surged to $162 billion during the same timeframe, a marked increase compared to last year. He expressed optimism that the situation in India could improve once a trade deal between India and the US is finalized.
Despite the challenges, a weaker rupee has potential advantages. It can enhance the competitiveness of Indian exports such as IT services, textiles, and pharmaceuticals in international markets, which may support export earnings. Additionally, it could encourage import substitution in sectors like electronics and chemicals. However, these benefits are tempered by the increased costs of essential imports, including crude oil, which sustains inflationary pressures and limits the overall advantages of a depreciated currency.
Published on September 18, 2025.
