RPT-BREAKINGVIEWS-Rupee slide is a rude wake-up call for India bulls
By Shritama Bose
MUMBAI, Sept 2 (Reuters Breakingviews) - India's rupee INR=IN is providing an unwelcome blast from the past. It hit a record low of 88.31 against the U.S. dollar on Friday. The depreciation will cushion the earnings of exporters hit by President Donald Trump's punitive tariffs. Foreign investors newly accustomed to much smaller declines in the currency will need to reset their return assumptions.
The slide is the latest sign the Reserve Bank of India under Sanjay Malhotra will allow the rupee greater latitude in tandem with market realities. In the nine months since he became governor, the currency has lost nearly 4% of its value - or 5% over the past year - compared to a 2.7% decline in the two years prior.
As a macro-economic strategy, it's sensible. Some $55 billion of India's U.S. goods exports - 70% of the $80 billion total - will be subject to a 50% tariff, analysts at Barclays reckon. Interfering less in money markets will avoid squandering a $691 billion foreign exchange war chest: the RBI concluded in July that the rupee was slightly overvalued against a basket of 40 currencies.
With consumer inflation expected to remain at 3.5% in August, a five-year low, Indians also can withstand the pinch of pricier imports. That's key. Fuel prices could tick up, especially if big importers led by Mukesh Ambani's Reliance Industries RELI.NS accede to U.S. demands to stop buying cheap Russian crude.
Such currency pragmatism will be required if the Indo-U.S. relationship worsens. Though Trump said on Monday that India has offered to cut its tariff rates, the Ambani family has cancelled a showpiece cultural event due to be held next week in New York, and Washington could yet take aim at banks and companies involved in the Russian oil trade with sanctions, or even target the $42 billion of services including IT that India exports annually to the U.S.
That points to a reversion to the longer-term trend of annual rupee depreciation of 3% or worse. A rate cut by the U.S. Federal Reserve would give India's currency some traction against the greenback, but Trump's trade war means investors can no longer count on an extraordinarily stable rupee.
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CONTEXT NEWS
The Indian rupee dropped to a record low of 88.31 against the U.S. dollar on August 29, breaching the 88-per-dollar mark for the first time.
The rupee's value has plunged since the US launched its global trade war 
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