Last month, the Indian rupee (INR) hit a record low against the US dollar and is now trading at roughly 85 rupee to the greenback. This was prompted by the election of Donald Trump as US president, whose policies are expected to boost the strength of the US dollar significantly.
His plans to impose massive tariffs on foreign goods entering the US are likely to raise prices for consumers, feeding higher levels of inflation and therefore requiring the Federal Reserve to maintain higher interest rates – potentially contributing to a stronger dollar. Many economists also expect his programme of tax cuts and deregulation to boost US growth, encouraging investors to prefer dollar-denominated assets as opposed to those in emerging markets, including India.
Edul Patel, co-founder and CEO of Mudrex, has noted that “adding to our economy’s strength, the Fed’s past two interest rate cuts will bring a gradual increase in dollar supply which could support the rupee’s recovery. However, it’s crucial to closely monitor Trump’s proposed trade policies, such as imposing tariffs of 10% or more on all US imports and potential [tariff] hikes on Chinese imports, to assess their long-term effects on the rupee.”
Anuj Choudhary, research analyst at BNP Paribas, further said that “we expect the US dollar index to strengthen further on growth optimism over Donald Trump’s victory in the US presidential elections as his pro-growth stance has to be funded by enhanced borrowings, leading to further weakness in US bonds. As the bond yields are likely to rise further on Trump’s win, it may be negative for [India’s] domestic currency.”
However, the election of Trump is just one factor that has prompted the rupee to tumble to record lows in 2024, despite the consistent intervention of the Reserve Bank of India (RBI) in foreign exchange markets to minimise volatility. The rupee took a particular hit after shock results in its election earlier in the year, which saw Narendra Modi unexpectedly lose his parliamentary majority. The rupee has been on the slide for some time now – and as it stands, there is little sign of it beginning to strengthen in 2025.
One factor putting pressure on the rupee is that Indian stock markets are seeing persistent outflows, meaning traders are selling off rupee-denominated assets. This started at the beginning of August over concerns of an economic slowdown in the US and rising geopolitical tensions globally, which prompted traders to reassess perceived riskier positions in emerging markets and shift their exposure to “safer” assets.
These trends have continued in the last few months, with foreign investors selling more than $11bn of equities in October and a further $1.5bn in November. Partly this is because traders are bearish on the performance of the Indian economy. Inflation is on the rise, with India’s consumer price index rising to 5.49% in September, significantly surpassing the RBI’s target of 4% and market expectations of 5%. GDP growth figures in September were also weak, while markets were recently disappointed by weak growth in the manufacturing sector. The continued sluggish performance of the Indian economy could put further pressure on the Indian rupee in the months ahead.
A weak rupee – while potentially fuelling higher inflation as a result of India’s massive trade deficit – is not all bad news for India. There have even been suggestions that the Indian central bank has been quietly pegging the currency to the Chinese yuan (CNY) and allowing the rupee to depreciate in order to keep Indian exports competitive with those of its Chinese counterparts. While the complete picture for 2025 is not yet clear, it does seem that the rupee is in for a prolonged period of weakness amid a challenging economic environment in India and the likelihood of an increasingly strong dollar.
Author: Harry Clynch
#India #IndianRupee #INR #ForeignExchange
