When Tariffs and Trade Winds Collide: The Story Behind INR’s Slump Against Sterling
INRGBP currency pair has not just drifted; it’s been swept along by a storm of macro forces, policy pivots, and geopolitical surprises. What’s really behind the rupee’s dramatic retreat against the pound?
Shockwaves from Washington: A Tariff Tsunami Hits Mumbai
August 2025 dropped a bombshell: the United States slapped a hefty 50% tariff on a broad swath of Indian exports. For an economy where goods exports remain a vital pressure valve, the impact was swift and severe. As India’s global competitiveness took a hit, capital flew out and the rupee was left exposed—falling to a record ₹89.66 per US dollar and plunging against other major currencies, sterling included.
For the INRGBP cross, this was a double whammy. Not only did the rupee weaken, but the British pound found support from a cautious Bank of England, which has kept rate cuts in check amid persistent UK inflation. The result? A currency pair that tumbled 11.1% in three months—mirroring its performance over six months and a full year.
Monetary Puzzles: When Easing Becomes a Tightrope Walk
India’s central bank, the RBI, has been loosening the monetary spigot. The repo rate has fallen from 6.5% in early 2024 to 5.5% by June 2025. Liquidity injections have flooded the system, while the cash reserve ratio was shaved down to 3% by late November. Yet, as policy turned “neutral,” the rupee found itself in a paradox: lower rates stimulate credit and growth, but they also make Indian assets less attractive to yield-hungry foreign investors. The result? Capital outflows that only accelerated the rupee’s slide against the pound.
Meanwhile, UK rates remain elevated, with the Bank of England holding steady even as UK inflation threatens to bite. This divergence has sent carry traders flocking to sterling, putting further pressure on the rupee.
Trade Agreements and the Waiting Game
The UK-India Comprehensive Economic & Trade Agreement (CETA), signed in July and lauded as the “biggest post-EU trade pact” for the UK, should be a boon for bilateral flows. Yet for now, the promise of tariff-free whisky and duty-slashing on auto parts is just that—a promise. Legal ratification isn’t expected until mid-2026, leaving the rupee with little immediate relief. In the meantime, India’s current account deficit remains stubborn, and the UK’s own trade deficit with India hit $8.4 billion in 2024.
Investors aren’t waiting for signatures—they’re moving capital in real time, and the rupee pays the price for every day of delay.
Inflation: Too Low for Comfort?
Paradoxically, India’s inflation has collapsed to historic lows—0.25% CPI in October, the ninth consecutive month below the central bank’s 4% target. It’s a dream for consumers, but for currency markets, it’s a red flag. Ultra-low inflation justifies more monetary easing, which in turn weakens the rupee’s appeal. And while the UK wrestles with high inflation and tax hikes, the pound’s yield advantage only grows more attractive.
Geopolitics: Not All Roads Lead to London
Beneath the headlines, deeper currents are at work. Washington’s protectionism has forced global investors to rethink their emerging-market playbooks. Even as India’s FX reserves hit a robust $692.6 billion, the RBI has had to intervene repeatedly to keep the rupee from breaching psychological levels. Meanwhile, the RBI-BoE memorandum on cross-border clearing—signed in 2023—has improved long-term market structure, but does little to counteract short-term volatility fueled by tariffs and capital flows.
The Macro Chessboard: More Than Just Numbers
Behind the numbers, the story is one of timing, perception, and the relentless logic of global capital. With the rupee down 11.1% against the pound in just 90 days, the market has rendered its verdict on India’s policy mix, its exposure to global trade shocks, and the slow-motion benefits of structural reforms. Until US tariffs ease, the UK-India trade deal kicks in, and the RBI finds the sweet spot between easing and stability, the currency pair will dance to the unpredictable rhythm of global risk.
For now, INRGBP’s story is a reminder: when tariffs and trade winds collide, even strong fundamentals can get lost at sea.