Rupee Braces for Pressure on Trump-Powell Escalation

The Indian rupee is under renewed pressure again on Monday, following U.S. President Trump's intensification of his ongoing dispute with Federal Reserve Chairman Powell. One-month non-deliverable forward contracts indicate that the rupee will open at approximately 90.22-90.28 mostly against the U.S. dollar after Friday's decline to 0.16% to 90.1625. 

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RBI Interventions Lose Traction

The Reserve Bank of India's (RBI) Dollar sales led to a short-term rebound to 89.75, disrupting many speculative long positions. However, a combination of FII outflows, hedging by importers, and a stronger dollar all contributed to reducing these gains too quickly. 

Fed Independence Under Scrutiny

The U.S. Prosecutors are investigating Powell criminally, which raises concerns about the Fed's autonomy and is also likely a pressure point on Powell, as a result of Trump's call for rate cuts and the threat of legal action. The impact of the investigation has overshadowed Friday's underwhelming payroll report for December, which added jobs at a much faster rate than anticipated but did not change the overall expectations for rate cuts.

Multi-Headwind Squeeze

The ongoing FII selling is adding to 2025's, continuing approximately at $18.8 billion net and has been exacerbated by the U.S.-India trade dispute and the imposition of tariffs at 50%. 

Policy Clash Implications

Its USD will likely experience significant volatility due to the ongoing friction between Trump and Powell, as historically, Fed threats have increased the VIX index by about 10 to 15 points. For example, if FY26 Rupee depreciation is 5%, that would equate to a 2% of GDP Current Account Deficit, which will be a serious strain on the Reserve Bank of India's dollar reserves. The forward exchange rates already include a 2% depreciation in the Rupee.
Domestic market factors contribute to offsetting the expected depreciation of the Rupee, including the resilience of Domestic Institutional Investors and compression of the CAD. Weakness in the job market increases the odds of a rate cut in March to about 70%, but if an investigation into Powell may prolong the time for a rate cut, it will support a stronger USD carry. Additionally, delays in signing trade agreements are creating additional pressure on the oil import bill.

Forward Scenarios

If FII investment continues to increase at an aggressive rate, it is likely the Rupee will breach the 90.50 level. A factor limiting future appreciation of the Rupee is the absence of clear signals in the upcoming budget regarding fiscal stimulus.
RBI will have to walk a fine line between maintaining the costs of interventions and keeping reserves intact while the U.S. continues to create chaos with its domestic policy.