Trump Effect: Will Rupee Hit 90 To The Dollar?

On October 12, for the first time, the rupee touched an all-time low of Rs 84.40 to the US dollar. Analysts are now forecasting the rupee may cross 90 to the dollar. However, the rupee's fall has been gradual as the RBI has been stepping in to curb any tendency towards high volatility.

Currency volatility refers to a situation when the value of a currency changes too fast or too frequently. While central bankers do not like volatility, they also do not like over-intervention, as then the markets bet on them to sell their hard currency stocks to prop up a national currency, which can lead to a sudden dip in reserves. 

“The RBI has been intervening from time to time, and will take any action required to ensure that there is no significant disruption. But we will of course not prop up or try to fix a rate for the rupee,” said officials of the State Bank of India's currency trading division, which is usually tasked with such excercises.

Stability of the rupee is key for the RBI, as it aggressively looks to expand rupee trade with other nations. India has already started bilateral trade using the Indian currency with several countries. However, for rupee trade to remain a more permanent feature, the currency needs to be stable, especially against the dollar.  

Earlier, RBI Governor Shaktikanta Das said volatility does not benefit the economy. "If you allow volatility, whom does it benefit? It does not benefit the economy. So why would we allow volatility?" he told journalists in September.

India’s exchange rate is largely market determined. In March 1993, India moved to the market determined order based on demand and supply. However, from time to time, the central bank has intervened to curb volatility.

A recent SBI report indicated that the rupee is likely to depreciate by 8-10 per cent during Trump’s four-year term, beginning next year. This potentially means the rupee could fall to between Rs 87 and Rs 92 to the dollar. While this is welcome news for exporters who could make a small killing by earning more rupee for the greenbacks they earn, it will mean India's imports, especially oil, will become costlier, straining our current account deficit.   

In the last four years — during the Joe Biden administration — the rupee depreciated by 14.5 per cent.

Rupee Fall Will Not Be Forever

Trump, who will return to the White House in January, has promised to chart out protectionist policies by imposing tariffs on imports.

Analysts said the Trump 2.0 regime could boost the American dollar during the initial phase of his administration, but at a later stage, the greenback could even touch new lows, on account of the tariffs and possible trade war. 

They, therefore, feel the rupee depreciation may be a temporary phenomenon. “The fall of the rupee is not an exception. Most of the emerging markets have been impacted and their currencies are under pressure,” a former senior executive of a public sector bank told The Secretariat. “There is no reason for unwarranted fear,” he said.

The weakening of the currency also makes imports costlier, in turn fuelling inflation, which has been one of the key concerns for the central bank. 

Trump, Inflation & Repo Rate

According to SBI estimates, a 5 per cent decline in rupee will increase inflation by 25-30 basis points, which is not significant.

“The rupee depreciation has been more or less accounted for, and will not impact broader economic dynamics. We will have to wait and watch how US policies pan out, once Trump takes over,” economist Nirupama Soundararajan, a founder and partner at Policy Consensus Centre, told The Secretariat.

“The rupee depreciation is also helping the exporters increase their competitiveness,” she said, adding that with foreign exchange reserves at US$ 682.13 billion, India has enough cushion to rule out any emergency.

India’s retail inflation based on consumer price index (CPI) for October inched upward to a 14-month high of 6.21 per cent, from 5.49 in September. Food inflation rose to 10.9 per cent — the highest in 15 months. With inflation once again raising its head, it is almost certain that the RBI will not reduce policy rates in next month’s monetary policy announcement.

Two analysts said that the reduction in repo rate — the rate at which banks borrow from the RBI — is not likely before the next financial year.

“It is not just the December Monetary Policy Committee meeting. The situation may not be comfortable even in February, as Trump would have just taken over. As a result, uncertainty would rise on an immediate basis... So, in all likelihood, the central bank is adopting a wait and watch policy,” an analyst said.

Trump’s policies, which include a proposal to reduce taxes, would not only build inflationary pressures, but also push a fiscal deficit. It is also to be seen whether he allows the Fed to act independently. The US dollar index -- a measure of the greenback in relation to six major currencies has been rising since the US election results, reaching the highest level in the last one year. The Republicans are now set to control both houses of the Congress making it easier for Trump to push his policies .

However, according to a report, “...the near-term strength of the dollar, however, isn’t likely to last throughout Trump’s four-year term. There are many longer-term risks to the greenback. The incoming president may press the Fed to keep cutting interest rates, despite any rebound in inflation.”

“Amid the rising geo-political and geo-economic risks, RBI will have to much larger role to play,” the analyst said.