Rupee Weaken amidst Trump Re- election
Context:
Triggered by the strengthening of the US dollar since Donald Trump’s victory in the presidential election, the rupee has depreciated 0.4% since 5 November (US election day), yet it is holding up better than its emerging-market peers.
Current Devaluation Trend of Rupee & Past Trends:
The Indian rupee has depreciated by 0.4% since November 5, following Donald Trump’s recent election victory. This decline adds to a broader historical pattern:
- During Trump’s first term (2016–2020), the rupee declined by 6.7%.
- Under Joe Biden’s presidency, the rupee fell more sharply, by 15.3%.
These trends highlight how global economic and geopolitical shifts during different US administrations influence the Indian currency.
What Does This Decline Imply?:
The rupee’s decline affects multiple economic areas:
- Current Impacts:
- Higher import costs, particularly for crude oil, can intensify inflationary pressures.
- Indian exporters benefit from improved competitiveness, as a weaker rupee makes their goods cheaper abroad.
- Future Implications:
- The ongoing depreciation could worsen the fiscal and current account deficits, especially if global commodity prices rise.
- Economists forecast the rupee could weaken further, breaching ₹85/USD within the next 2–3 months.
Is This Decline Good for India at This Point?:
The rupee’s weakening has mixed implications:
- Advantages:
- Boosts export-oriented sectors like IT and pharmaceuticals.
- Supports economic recovery by enhancing India’s trade competitiveness.
- Disadvantages:
- Imported goods become costlier, increasing inflation.
- Fiscal stress could escalate due to higher government spending on imports and subsidies.
Given India’s current economic priorities, the benefits of a weaker rupee may outweigh its risks, but only if inflation is managed effectively.
RBI Intervention and Declining Forex Reserves as a Roadblock:
The Reserve Bank of India (RBI) has been actively intervening in forex markets to curb rupee volatility. However, this has led to a decline in India’s forex reserves, which fell from a record $704.89 billion (September 27) to $675.7 billion.
- Challenges for RBI:
- Limited reserves may constrain RBI’s ability to intervene aggressively.
- Forex reserve depletion could weaken India’s financial stability in the long run.
Expert Views on Rupee Valuation and Trade-offs of a Stronger or Weaker Rupee
For a Weaker Rupee:
- Advantages:
- Improves trade competitiveness.
- Supports export-driven growth.
- Disadvantages:
- Adds to inflationary pressures.
- Risks fiscal imbalance and higher current account deficits.
For a Stronger Rupee:
- Advantages:
- Controls inflation by reducing import costs.
- Enhances investor confidence and economic stability.
- Disadvantages:
- Hampers export competitiveness.
- Slows down sectors dependent on global demand, like IT.
Experts like Radhika Piplani (DAM Capital) suggest the rupee is overvalued and ready for further depreciation, while the State Bank of India predicts an 8–10% decline under Trump’s second term but downplays fears of sharp depreciation.
Comparison of Rupee decline with other countries :
- The rupee has depreciated less than other emerging-market currencies:
- Chinese yuan: -1.7%.
- Thai baht: -3.6%.
- Malaysian ringgit: -2.9%.
- The yuan’s weakening has pressured the rupee to depreciate further to maintain trade competitiveness.
As China aggressively weakens its currency, India may have to align its strategy to avoid a worsening trade deficit.
RBI’s Future Policies Amid a Weakening Rupee?:
The RBI is likely to adopt a cautious, gradual depreciation strategy:
- Maintain controlled weakening to avoid market shocks.
- Use targeted interventions to smooth out volatility without exhausting forex reserves.
- Focus on inflation management as a priority, given the inflationary impact of a weaker rupee.
Should RBI Intervene to Arrest the Rupee’s Decline?:
- Arguments for Intervention:
- Stabilises the rupee to prevent market panic.
- Helps control inflation by reducing the cost of imports.
- Arguments Against Intervention:
- Aggressive interventions deplete forex reserves.
- A weaker rupee benefits exports and supports growth in certain sectors.
