Rupee unshaken amid US-China trade war. India may even gain from it.

However, some economists are optimistic that China will use other channels to offset the impact of the US’ additional tariffs on the country.

Earlier this week, People’s Bank of China weakened its fixing rate—the centre point of the band in which the yuan or Chinese renminbi is allowed to trade—to just below RMB 7.2 per US dollar. That is the lowest level since September 2023.

This set off speculation that China would weaken its currency by up to 30% to counter the US tariffs. That said, the yuan has been under pressure from other factors as well, as China’s balance of payment was negative in the 12 months to September despite a record goods trade surplus.

According to economists at global brokerage firm Nomura, China is unlikely to signal to the world that it will use currency to improve its competitive advantage. 

Instead, they said, China would use tools such as monetary and fiscal policy, and negotiations with other countries to offset the impact of US President Donald Trump’s series of additional tariffs on the Asian economic giant.

On Friday, China said it would raise tariffs on all US goods from 84% to 125% from 12 April as a counter to the US’ decision to increase tariffs on Chinese goods to 145%.

“Unlike in 2018-19, and considering a property market crisis, we believe that the PBoC (People’s Bank of China), in order to maintain domestic financial and property market stability, will choose to not devalue RMB or engage in/allow for any substantial currency depreciation," Nomura said in a report on Thursday.

However, Mitul Kotecha, head of foreign exchange and emerging markets macro strategy Asia, at Barclays Bank, expects a gradual depreciation of the yuan. 

“But if they do something more aggressive in terms of devaluation, it could end up being kind of a bit of a race to the bottom because it could mean that other Asian countries move to depreciate their currencies," Kotecha said. “We have a forecast of 7.5 for Chinese yuan and rupee forecast at 88.2 by end of this year."

India has a head start

Other economists said it would be hard to weaken a currency when the US dollar is also losing strength. The US dollar index fell 4.6% in April, reflecting growing concerns about the impact of trade tensions on the US economy.

Neelkanth Mishra, chief economist at Axis bank and a member of the Prime Minister’s Economic Advisory Council, however, said countries may be tempted to use policies like currency devaluation to offset the impact of the US tariffs. 

In a report dated 13 March, before Trump unveiled his reciprocal tariffs on 2 April, Mishra likened the tariff war to the years after the 1930 Smoot-Hawley tariffs, which saw large currency swings.

In the ongoing global tariff war, some economists believe China’s loss will be India’s gain, as New Delhi has been proactive in negotiating a bilateral trade agreement with the US. 

Also, India may not be hurt much by the US’ tariffs as its export share to GDP is relatively lower than that of other countries, economists said. The weak dollar environment also ensures flows back into emerging market economies.

Also read | India dodges tariff bullet—for now—as Trump targets China

“India also has a head start on other countries in terms of negotiating a trade deal with the US. Over the medium term, this “tariff arbitrage" could favour India, if complemented by the right set of reforms," the Nomura analysts said in their report.

The brokerage, however, lowered its projections for India’s economic growth in 2025-26.

“In the near term, the global growth slowdown adds to existing growth drags, including weak private capex, household balance sheet stress, weak nominal income growth and the negative credit impulse. Therefore, we cut our FY26 GDP growth forecast to 5.8% from 6.0%."

This is lower than the Reserve Bank of India’s projections. The central bank earlier this week cut its FY26 growth projections for India to 6.5% from 6.7%.

‘The rupee is stable’

India’s central bank has been actively intervening in the currency market since 2 April when Trump announced his reciprocal tariffs on more than 180 countries. The rupee has fallen by 4% since then to 86.09 against the US dollar at the close of Friday’s trade.

RBI governor Sanjay Malhotra on Wednesday ruled out the possibility of any impact on the rupee from a potential currency war. He assured that the rupee was stable and that the central bank would intervene only if there was excess volatility.

“Our currency is quite stable and we have sufficient reserves of almost $700 billion and inching up. Our deficit is very sustainable both this year and going forward. I really don’t think we are under any kind of a stressful position again. Our interconnectedness, especially on the trade side, is less," Malhotra said after RBI’s latest monetary policy committee meeting.

“I think the markets in India are quite deep, quite wide, and the market forces best know what the levels should be. Having said that, in case of any excessive volatility that requires an intervention, we will not be found wanting," he added.