Rupee In Choppy Waters As Hawkish Fed Moves To Boost Dollar
While Prime Minister Narendra Modi’s ‘friend’, the US
President-elect Donald J Trump, is set to move into White House, once again, it
need not be particularly beneficial for India. If anything, Trump can be said
to be “anti-India” even while remaining “pro-Modi”. The camaraderie contrasts
starkly with the president-elect’s anti-India economic stance, which has
already manifested in threats of retaliatory tariffs and a staunch defence of
the US dollar as the global currency.
Trump’s assertion stems from his dissatisfaction with New
Delhi's high tariffs on certain American products. This reflects his broader
policy of prioritizing American economic interests, often at the expense of
long-standing trade partnerships. For India, which is heavily reliant on
exports to sustain its trade balance, such threats signal potential
disruptions. A strained trade relationship with the US could exacerbate
existing economic challenges, particularly when the Indian economy is grappling
with a slowdown.
One significant area of concern for India lies in Trump’s
unwavering support for a strong US dollar. His administration’s emphasis on
defending the dollar's position as the default global currency underscores a
broader strategy to secure American dominance in the global financial system.
Within days of his election, Trump issued warnings to BRICS nations, including
India, against moves that could threaten the US dollar’s supremacy.
India, while diplomatically downplaying these warnings, has
engaged in rupee-based bilateral trade with certain countries to reduce
dependence on the dollar. However, such initiatives are in their infancy and
cannot offset the broader impact of dollar-centric global trade policies.
The strength of the US dollar under Trump’s presidency has
already dealt a severe blow to the rupee, which has touched historical lows
against the dollar. This decline is attributed to multiple factors, including
robust U.S. economic data that reinforces the Federal Reserve's hawkish stance
on interest rates.
Higher U.S. rates attract capital flows away from emerging
markets like India, exacerbating the depreciation of the rupee. A weaker rupee
inflates the cost of imports, particularly crude oil, thereby widening the
trade deficit and fuelling domestic inflation. The Reserve Bank of India's
interventions to stabilize the currency have had limited success. Over-reliance
on forex reserves to stabilize the rupee could deplete India’s reserves,
leaving the economy vulnerable to external shocks.
Domestically, the Indian economy is facing significant
challenges that contribute to the rupee's decline. An economic slowdown
characterized by subdued industrial output, declining consumer demand, and
weakened investment sentiment has eroded confidence in the Indian economy.
Slower economic growth reduces the appeal of the rupee to foreign investors,
who perceive emerging markets as higher-risk during periods of uncertainty.
Additionally, India’s current account deficit, which arises
when the country imports more than it exports, places sustained pressure on the
rupee. With global oil prices recovering and India being a major oil importer,
the demand for dollars to pay for these imports has surged, adding to the
rupee's woes. Another crucial factor is the rising inflationary pressure.
Inflation erodes the purchasing power of the currency and undermines investor
confidence.
Additionally, the rupee’s decline is influenced by
structural issues within the Indian economy. Key indicators such as industrial
output and consumer spending have shown signs of weakening. The banking sector,
burdened by non-performing assets (NPAs), has limited capacity to finance
growth. Despite government initiatives to recapitalize banks and stimulate
lending, the pace of economic recovery remains slow. This has further dampened
investor sentiment and weakened the rupee. Moreover, the ongoing transition to
a digital economy, while promising in the long term, has created short-term
disruptions in traditional business models, affecting overall productivity and
economic output.
The impact of Trump’s policies on the rupee is further
compounded by global trade uncertainties. Protectionist measures and the
possibility of a trade war have created volatility in global markets, affecting
emerging market currencies, including the rupee. The IT and pharmaceutical
sectors, which are major contributors to India’s exports to the US, could face
significant headwinds if restrictive policies are implemented.
Trade tensions between major economies, including the
US-China trade war, have led to shifts in global supply chains and investor
behaviour. India, as part of the global economy, is not insulated from these
effects. The heightened risk aversion among global investors has led to a
preference for safe-haven currencies like the US dollar, putting additional
downward pressure on the rupee.
The strengthening of the US dollar under Trump’s presidency,
coupled with domestic economic challenges and global uncertainties, has created
a challenging environment for the Indian currency. While India has taken steps
to mitigate some of these pressures, such as promoting rupee-based trade and
stabilizing the forex market, the path to a stable and strong rupee requires
addressing underlying structural issues within the economy and adapting to the
evolving global landscape. For India, navigating the complexities of Trump’s
presidency poses formidable challenges and there is very little Modi can do to
influence Trump’s thinking, notwithstanding the highly overstated friendship
between the two. (IPA Service)
