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Investing.com -- The Indian rupee and stock markets are set for further weakness as a slowing domestic economy and an unfavourable external environment weigh on investor sentiment.

The rupee has been among the worst-performing emerging market currencies in recent months, while Indian equities have underperformed the broader emerging market benchmark since late last year. The MSCI India Index has lagged across all sectors.

While U.S. trade policy under Donald Trump has rattled global markets, India has largely avoided direct scrutiny so far. Its relatively small trade surplus with the U.S. could offer some insulation, and escalating U.S.-China trade tensions may even open opportunities for India's manufacturing sector.

But India's high tariff barriers could make it a target if the U.S. follows through on proposals for reciprocal tariffs. Meanwhile, the Reserve Bank of India (NSE: BOI ) has shifted to a more dovish stance, allowing the rupee to depreciate significantly since the appointment of its new governor.

With economic growth slowing sharply, inflation trending lower, and the real effective exchange rate near a record high, the RBI appears to have loosened its grip on the currency, increasing the likelihood of further rupee weakness.