MUMBAI/SINGAPORE, Dec 17 (Reuters) – No currency has been hit harder by U.S. tariffs than India’s rupee – and there could be more downside as investors pull out of the country until they see a trade deal with Washington sealed. The rupee has been one of the worst performing currencies globally this year, falling 6% against the dollar as a widening trade deficit, punitive 50% US tariffs and investment outflows dragged it to a record low of 91.075 per dollar. Measured against a basket of trading partner currencies, the real effective exchange rate of 96 is the lowest in more than a decade, according to Citi. That’s well below a decade average of 103, and a usually reliable signal that it’s overdue for a rebound. But this time is different, according to money managers who have driven pressure on the currency by pulling a record $18 billion out of Indian stocks this year and say the mood is unlikely to reverse quickly, even if the rupee looks cheap. “I think the market’s patience in general is running out,” said Vivek Rajpal, Asia macro strategist at investment advisory firm JB Drax Honore, as months of trade talks with the US have so far yielded no deal or tariff relief. This is a good entry point for Indian assets, he said, but first the market needs to have confidence that the tariffs are only temporary. India and the US have been engaged in negotiations through much of 2025, although India’s chief economic adviser said in a Bloomberg interview last week that he expected an agreement to be reached by March 2026. Still, much of Asia already has agreements or at least moratoriums in place with the US, leaving India particularly exposed and the rupee as the shock absorber. Rupee weakness here to stay A falling currency can soften the blow from rates by lowering dollar prices for exports. But at 50%, US tariffs are so high that economists expect more weakness in the rupee to offset them, plus there is added pressure on the currency from a relatively wide trade deficit and portfolio outflows. Absent a trade deal, none of these factors are seen to reverse in the near term and a Reuters report that the central bank does not plan to stand in the way of fundamentals has reinforced expectations of further weakness. HSBC analysts said the sharp rupee depreciation was a significant risk to an otherwise encouraging setup for Indian equities, which they said was worth revisiting thanks to improving valuations and economics. They also see Indian markets as a hedge against the AI ​​rally. Other brokerages, including Citi, Goldman Sachs and JP Morgan, have also upgraded Indian stocks in recent weeks, expecting a turnaround in the Indian market’s fortunes in 2026 with a boost from rate cuts and, to be sure, some recovery in the rupee. “The recent rate of depreciation has been partly driven by geopolitical risk and its influence on current account expectations,” said Jean-Charles Sambor in London, head of emerging markets debt at TT International Asset Management, with more than $5 billion in assets under management. “We believe that some of this risk may now be overestimated,” Sambor said. He declined to disclose positioning and neither performance nor flow suggests investors are snapping up rupees. Dilemma for global investors Indian stock markets, dominated by banks and IT outsourcing firms, have also lagged peers in 2025, with the benchmark Nifty 50 up about 10% year-to-date compared with a 26% gain in the MSCI Emerging Market Index, hurt by a lack of clear AI bets. In dollar terms, comparisons are even more unfavorable with MSCI’s India stock index up less than 2% this year versus a nearly 30% rise in MSCI’s China index, a rival for foreign investors’ allocations. Investors are also turning to China’s experience in US President Donald Trump’s first term in office for a guide to how far the rupee could fall. Jitania Kandhari, deputy chief investment officer of the solutions and multi-asset group at Morgan Stanley Investment Management compared the drop in rupee to the Chinese yuan’s depreciation due to trade tensions between the US and China during Trump’s first term, saying the rupee may have to continue to weaken if the rates remain in place. The yuan fell by around 12% between March 2018 and May 2020 due to a series of tit-for-tat rate announcements. Her firm, which manages $1.8 trillion in client assets, maintains an overweight position on Indian stocks, even as it has reduced its holdings and found value elsewhere. “Rupee depreciation is necessary to improve the competitiveness of Indian exports,” said Kunjal Gala, head of global emerging markets at Federated Hermes, which has been underweight on India since the start of 2024. “However, a depreciating rupee creates a dilemma for global investors indexed against the dollar.” (Reporting by Jaspreet Kalra and Dharamraj Dhutia in Mumbai and Ankur Banerjee in Singapore; Editing by Sam Holmes)