Will Trump risk inflation to keep electoral promises?

India's Prime Minister Modi with U.S. President elect Donald Trump

Trumponomics could mean higher inflation, a weaker rupee and greater outflows from India. This given that US president-elect Donald Trump has promised cuts in corporate tax rates, high tariffs—60 percent on Chinese goods and between 10 and 20 percent on all other imports; and large-scale deportation of immigrants.

Economists estimate that even a 10 percent hike in tariffs by the US on imported goods and services could increase America's domestic inflation by 0.8 percentage point.

The intent behind such sweeping changes is to get US businesses to make in America again.

But such policies typically spell bad news for emerging markets.

“With Trump’s tax cuts, there will be more debt, higher interest rates, stronger dollar—it will be a negative for emerging markets,” explained Somnath Mukherjee of ASK Wealth Advisors.

Foreign institutional investors (FIIs) repatriated nearly $10 billion worth of investments from the Indian stock market in October alone.

A weaker rupee

The Indian currency became one of the first casualties of the red sweep in the US thanks to a re-energised dollar.

The rupee weakened to an all-time low on November 6 since early indications of Donald Trump’s return as president led to a rally in the US dollar.

The rupee fell to 84.1950 against the dollar, down about 0.1 percent from its Tuesday close. And experts see the rupee remaining weak for some time due to concerns around potential sanctions and protectionist policies, given Trump’s history of embarking on a more intense America-first agenda.

According to a report by HDFC Bank Treasury Research Desk, the rupee may depreciate further towards a range of 84.20-84.50 over the next two to three months, before moving to 84.50-85.0 in the first half of 2025.

The rupee’s weakness is invariably linked to expectations of a stronger dollar under Trump’s presidency as he is widely expected to stimulate the domestic economy, extending the tax cuts introduced in his previous term.

“Trump 2.0 will see further fiscal thrust coming predominantly by full extension of the 2017 tax cuts (expiring end-2025), with spending focus on infra, tech, and defense. Broad extension of tax cuts was estimated to increase the cumulative deficit by $4.6trn over a decade, with Trump-led policies being more extravagant at over USD7.5trn, sans any taxes/tariff hikes,” Emkay Global analysts Madhavi Arora and Harshal Patel said in a note.

“The strength of the dollar index coupled with high US yields are inevitably negative for INR. The currency will face depreciation pressures. This can be further exacerbated by FII outflows. RBI (Reserve Bank of India) is likely to step up and use FX (foreign exchange) reserves to avoid a sudden slip in INR. We maintain our depreciative bias on INR,” read a report from Angel One Wealth.

Foreign portfolio investment

There are also worries that given the expectations of a weaker rupee, India could see an exodus of foreign portfolio investments (FPIs).

“A Trump win may likely re-energise the dollar and renew investor interest in US assets which may, in turn, accelerate foreign portfolio outflows from India to an extent,” said Narendra Singh, smallcase manager and founder at Growth Investing.

India has already been witnessing record outflows from debt and equity for different reasons.

FPI outflows from Indian equities reached a record $11 billion in October as investors shifted to Chinese stocks following the announcement of new economic support measures in that country, while FPIs turned net sellers in debt in the same month for the first time since April due to a narrowing India-US interest rate differential, as per CareEdge Ratings.

Interest rates

The volatility in the Indian currency and bond markets could spill over to the RBI’s rate cycle as well.

“The spillover of bond and FX volatility via the global financial markets route would mean the aim of financial stability may precede inflation management, and thus may merit a wait-and-watch approach for some EM central banks, including the RBI. This makes the December rate cut call tricky and may possibly lead to a shallower rate-cut cycle, following the Fed (the US Federal Reserve),” according to Arora and Patel.

Experts believe a volatile global financial market further strengthens the RBI’s resolve to not cut rates in December, especially given that food inflation is yet to ease to desirable levels.

RBI governor Shaktikanta Das also recently stated that a change in stance does not warrant a rate cut in December.

However, amid all the worries, experts believe that the possibility of India becoming a closer strategic partner for the US to counter China may compensate for the troubles on the FPI side by boosting foreign direct investment (FDI).

“I believe India will receive more FDI in areas like manufacturing, technology in defence and more global capability centres. It would look like more FDI versus FII in the medium term,” said Singh.

Trump's rhetoric and the reality on China

The big question is whether Trump will follow through with his campaign election threats of raising tariffs on Chinese imports into the US.

“A 60 percent tariff looks ridiculous. From raw materials to technologies and capacities to produce, China holds several keys. Increasing tariffs on Chinese goods will be inflationary and depreciate the Chinese currency. The interconnectedness of the world economy will push India into depreciating the rupee further,” said an economist with a global bank, on condition of anonymity.

A temperamental Trump poses unique challenges to India. But he also knows that inflation was one of the key reasons why his competitor Kamala Harris lost this election.

This leaves the Republican heavyweight with a complex choice—to follow through with election rhetoric or keep inflation down.