The Indian rupee sank to a new low of 87.50 per dollar in afternoon trade on Wednesday, continuing its fall on concerns over US President Donald Trump’s tariff policy and the possible decision on Friday by the RBI-led monetary policy committee (MPC) to cut interest rate after almost five years. 

Trading with a negative bias over global trade war, the rupee eventually closed at an all-time low of 87.46 (provisional) against the US dollar on Wednesday. This was 39 paise lower than the Indian currency’s previous day close. While the US and China have imposed tariffs against each other, more such action is anticipated involving other countries as Trump has started weaponising tariffs to bargain deals favouring America.

The downward pressure on the rupee is also felt following rising expectations that the Reserve Bank of India would announce on Friday a 25 basis-points rate cut in benchmark policy to push forward growth which has been showing signs of slowing. The last time the RBI had reduced the repo rate was by 40 basis points to 4% in May 2020, an emergency measure to support the economy which was  ravaged by the Covid pandemic and subsequent lockdown.

The MPC, which began its three-day meeting on Wednesday, will announce its decision on interest rate cut on 7 February.

While the Indian currency is under stress amid persistent foreign outflows, uncertainty surrounding US trade tariffs and expectations of domestic rate cuts, the RBI has become more tolerant of rupee depreciation as its focus has shifted towards supporting growth.

The rupee will operate under volatile conditions and will have to resist downward pressures. "While the rupee has depreciated by only around 5% in the last two years, it has fallen over 20% since January 2020, making it one of the weakest-performing currencies in South and Southeast Asia," Moody's said in its report on Corporates ' South and Southeast Asia Emerging Markets.In the domestic equity market, the 30-share BSE Sensex settled 312.53 points, or 0.40%, lower at 78,271.28, while the Nifty fell 42.95 points, or 0.18%, to close at 23,696.30.