India announced austerity-linked policy steps as tensions in the Strait of Hormuz put pressure on capital flows and the balance of payments. These measures were presented as support for the Indian Rupee, which has continued to reach record lows.
The Finance Ministry raised import duties on gold and silver to 15% from 6%, effective 13 May. It also capped duty-free gold imports under the Advance Authorisation scheme at 100 kg per approval.
India is also considering reducing withholding taxes paid by foreign holders of domestic bonds, according to a Bloomberg News report. The change was recommended by the Reserve Bank of India to the Finance Ministry.
MUFG maintained a cautious stance on the rupee against G10 and Asian currencies, even under a de-escalation scenario. The article notes it was produced using an AI tool and reviewed by an editor.
With India taking significant policy steps to support the rupee, we are seeing a defensive reaction to geopolitical pressures. The sharp increase in import duties on gold and silver to 15% is a clear attempt to manage the balance of payments. These measures are designed to curb non-essential imports as the rupee continues to face downward pressure.
This environment suggests that the Indian Rupee’s weakness may persist despite these interventions. Recent data shows India’s current account deficit widened to 2.1% of GDP last quarter due to high energy import costs, while retail inflation remains elevated at 5.9%. These fundamentals, combined with foreign portfolio investors pulling over $2.5 billion from equities last month, add to our cautious view.
For derivative traders, this outlook suggests positioning for further rupee depreciation against the US dollar. Buying USD/INR call options could be a prudent strategy, as it offers upside exposure if the rupee weakens while capping downside risk to the premium paid. Elevated implied volatility in the currency pair also presents opportunities for those trading options spreads.
We saw a similar pattern in late 2025 when a spike in commodity prices led to capital outflows. Back then, the rupee depreciated by nearly 4% in the following quarter even after the government announced comparable import restrictions. This history suggests the current policy moves might only slow the decline rather than reverse the trend.
Therefore, we remain cautious on the rupee compared to other major currencies. The potential move to lower withholding taxes on bonds could attract some capital, but it may not be enough to offset the broader negative sentiment. Any policy-induced rally in the rupee in the coming weeks could be viewed as an opportunity to initiate bearish positions.
