Indian rupee becomes Asia’s worst performing currency, but there’s a silver lining to it

India’s rupee has turned into Asia’s worst-performing currency this year. The culprit? Stalled trade talks with the U.S. and a steady stream of foreign investors pulling their money out.

The currency is trading at 89.6 to the dollar right now. That’s a far cry from where it started the year at 85.64. And experts think it’s going to get worse. Both Nomura and S&P Global Market Intelligence say the rupee could hit 92 per dollar by the end of March.

Any recovery depends heavily on whether India can strike a trade deal with Washington. Hanna Luchnikava-Schorsch, who heads Asia-Pacific economics at S&P Global Market Intelligence, thinks the rupee is undervalued right now, but says it won’t correct “until there is more clarity on the U.S.-India trade agreement.” Her team expects a deal in the next six months.

Here’s the problem. India has tariffs at 50%, making it one of the most heavily tariffed countries anywhere. That’s higher than even China faces. Trade talks between New Delhi and Washington keep dragging on with no end in sight.

When steep tariffs kicked in last August, the damage showed up fast. India’s exports to America fell nearly 12 percent in September. October wasn’t much better, down 8.5 percent. November brought some relief; exports shot up 22.6%.

But Sonal Varma, who’s chief economist for India and Asia ex-Japan at Nomura, sees bigger risks ahead. Companies that make things mainly for the American market might look elsewhere if the high tariffs stick around. India could lose out on supply chain shifts. “Prolonged uncertainty has led to foreign portfolio outflows, and a weaker rupee can affect import costs and inflation,” she said.

Foreign investors head for the exits

Foreign investors have been heading for the exits all year. More than $10 billion has flowed out across different investment types, according to NSDL data. The stock market got hit especially hard—foreign portfolio investors yanked out nearly $18 billion through December 19.

Earlier this month, the rupee broke through the 90-mark against the dollar. That’s a big psychological level. Then it took less than 15 trading sessions to cross 91. The slide has been quick.

Somnath Mukherjee works as CIO and senior managing partner at ASK Private Wealth. He told CNBC’s “Inside India” that the rupee’s troubles aren’t really about India’s current account deficit. That’s expected to stay manageable between 1 percent and 1.5 percent. The real issue is foreign investors pulling out. The rupee will stay under pressure until that trend reverses, he said.

For foreign investors, the weak rupee cuts both ways. Luchnikava-Schorsch called it “a double-edged sword for FIIs.” Sure, it could be “a good entry point for Indian equities.” But investors also have to think about “protracted rupee weakness and trade policy uncertainty,” plus concerns about government finances and growth prospects.

India’s economic challenges have intensified as trade policies shift globally. The world’s fifth-largest economy faces mounting pressure from multiple fronts.

Central bank steps in

India’s central bank said earlier this month it would let market forces set exchange rates. But on Wednesday, the bank reportedly jumped in “aggressively” to stop the currency from falling further.

There is an upside to all this. A cheaper rupee makes Indian exports more competitive globally. And because domestic inflation is relatively low, the country has some cushion to handle higher import costs from the weaker currency.

Recent developments in U.S.-India negotiations suggest both sides are working toward a breakthrough, though concrete results remain elusive. Until then, the rupee is likely to remain under pressure as investors wait for clarity.

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