What Trump’s win means for the Indian rupee

Mumbai: The Indian rupee is expected to remain under pressure on the back of a strengthening US dollar as Donald Trump wins the presidential race, experts said, prompting the Reserve Bank of India (RBI) to curb volatility in the forex market.

On Wednesday, the rupee hit a record low and closed at 84.28 against the dollar. A Trump victory implies geopolitical uncertainty amid concerns on the extent of trade tariff hikes he may impose on economies like China. He has promised a 60% tariff on Chinese goods and a loose fiscal policy.

“However, in a slowing and fragile global economy, we firmly believe that economics is likely to trump politics,” said Kanika Pasricha, chief economic advisor, Union Bank of India. “In the world that we are living in with limited policy space, especially from fiscal policy perspective, the extent to which Trump may stay true to his poll promises may be curbed in our view.”

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Still, she said, a rise in global risk aversion would mean that the rupee may see further pressure after touching fresh record lows on Wednesday. With RBI still holding a significant amount of forex reserves built for rainy days, the central bank would stand ready to curb volatility, she said.

Defending the currency

India’s forex reserves stood at $684.8 billion as on 25 October, showed data from RBI. Reuters reported citing unnamed people on 4 November that RBI would be able to tap its foreign exchange reserves to defend the domestic currency in the event of global market volatility and an outflow of foreign funds.

“While the initial move of the dollar might be an overreaction, the clear way for the rupee is weaker in a Trump presidency,” said Dhiraj Nim, economist and forex strategist, ANZ Research. “In the near term, there will be pressure on the rupee which RBI will fight and will certainly temper volatility.”

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Nim said it is more important to see what happens over time as Trump’s policies are particularly negative for China, and the yuan may respond with weakness.

“Then the Indian rupee will have to weaken in tandem. In the near term, RBI smoothens the fall of the rupee and does not let it appreciate too much when the dollar pulls back, and when the yuan weakens significantly, I think they would want to maintain some parity.”

There are experts who believe the market is not completely clueless about Trump’s policies this time round. Anindya Banerjee, vice-president, currency derivatives and interest rate derivatives at Kotak Securities, said the market is basically playing the same script as 2016, which was the first presidency of Trump.

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“If you see what happened after the election in 2016, for a month or so, the dollar rallied, the US bond yields rose, and the emerging equity markets did not do well,” said Banerjee. The difference between 2016 and now is that then the Fed was tightening the monetary policy, and now it is loosening the monetary policy, he said.

According to him, the rupee will be under pressure owing to a Trump win and can go towards 84.5 against the US dollar. “But I think after that we could see the rupee come back towards 84-level. RBI is there in the market and any day such events happen; RBI is there to curb volatility.”

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