Trump 2.0: India has to brace itself for a rough rupee ride, trade tantrums

India's Prime Minister Narendra Modi and US President Donald Trump

With a few hours left for Donald Trump’s swearing in as the 47th President of the United States, Moneycontrol takes a look at what is in store for India during this business tycoon-turned politician’s second stint at the White House.

From potentially a tougher trade stance to the flight of foreign capital, India has a lot to brace itself for ahead of Trump 2.0, albeit with a silver lining around the China-plus-one strategy.

The rupee

The Indian currency was one of the first casualties of Trump’s electoral victory as it began to weaken in the second half of the current fiscal year thanks to a re-energised US dollar.

While the rupee recovered 15 paise during early trading hours of January 20 as the dollar index eased, it has been in a free-fall for the past many weeks, depreciating by as much as 3 percent against the greenback.

The rupee, which was moving in the range of 84-85 for quite some time, logged its steepest single-day fall in nearly two years and ended the January 13 session 66 paise down at its historic low of 86.70 against the dollar.

A stronger dollar since November 2024, thanks to Trump’s victory, led to foreign outflows from emerging markets, including India, as investors opted for higher returns in the US.

"Since USD-INR breached 84.0 at the beginning of October 2024, the rupee’s fall has accelerated, with the currency now verging on a test of 87.0," Barclays said in a report dated January 16, adding that the factors causing the rupee's fall, primarily a stronger US dollar, have intensified ahead of president-elect Trump’s inauguration.

A weaker rupee has been the major cause behind dwindling reserves even as India’s central bank continued to intervene in the forex market to manage any volatility in the currency.

This is evident from the fact that India’s foreign exchange reserves touched a 10-month low of $625.9 billion for the week ended January 10, according to data released by the Reserve Bank of India.

Some point out that a weaker rupee may increase India’s competitiveness in exports, since this means Indian goods and services become more affordable in global markets.

However, Indian authorities are also worried about the impact of a falling rupee on the country’s import bill, leading to a spike in imported inflation.

“The weaker rupee will increase India’s import bill led by high payments for crude oil, coal, vegetable oil, gold, diamonds, electronics, machinery, plastics and chemicals… For sectors relying heavily on imports, a weaker rupee increases input costs, reducing competitiveness,” Global Trade Research Initiative pointed out in a note.

According to a report from State Bank of India Research, though, the impact of Trump’s presidency on the local currency is likely to be short-lived. “Empirical evidence suggest that Trump Tantrum for INR will be a short-term phenomenon, and rupee should adjust post the initial shock of early days of Presidency,” the report said.

Tariff wars

Trump’s take on tariffs has been one of most direct threats for emerging markets as well as developed economies.

From early in his campaign, Trump has issued many statements indicating higher duties on key exporting nations, including India, which he termed a “tariff abuser”.

Notably, higher tariffs on Indian exports would also hurt the US by making key products more expensive for its consumers, thereby stoking inflation.

The soon-to-be sworn in US president back in November said that he would sign an executive order imposing 25 percent additional tariffs on all imports from Canada and Mexico and an additional 10 percent on inbound shipments from China. These measures, he said, were meant to curb issues around dumping of drugs and migrant inflows.

Shortly after this, Trump threatened 100 percent tariffs on goods coming in from BRICS nations, including India, if there are attempts made to undermine the US dollar as the reserve currency of the world.

At the Kazan, Russia, summit of BRICS nations, which apart from the original Brazil, Russia, India, China and South Africa also included new inductees Egypt, Ethiopia, Iran and the United Arab Emirates, there had been discussions of a gold-backed currency that could replace the US dollar as the preferred currency of international trade.

Specifically, the 47th US President’s threat around BRICS could also hurt India’s efforts to internationalise the rupee, a measure that has seen limited success so far.

During his campaign, Trump had promised raising import duties to as high as 60 percent on Chinese goods, which could trigger retaliatory or pre-emptive actions from Beijing. Trump’s take on trade possibly leading to retaliation from China could also hit Indian exports as seen in the case of the nation’s solar panel industry, which relies heavily on imports of Chinese components.

Expressing caution around a “tit-for-tat” scenario in the future, Philippe Varin, chair of the International Chamber of Commerce (ICC), in November 2024 said that any measure leading to a tariff war between the US and China may adversely impact global trade.

Due to American sanctions and a US dollar reserve crunch in certain countries, India has been trying to push for local currencies in trade transactions. Russia, the UAE and Singapore are some of the nations that have taken steps to allow the use of in-house payment interfaces as well as domestic legal tenders to smoothen transactions with New Delhi.

China plus one

While Trump's comeback is expected to lead to higher tariffs on Indian exports such as steel, some anticipate America’s hyper-focus on the China-plus-one strategy could end up benefiting the South Asian nation in the long run, where US companies could diversify their supply chains to include India, especially if Trump implements steeper tariffs on Beijing.

The US is India's largest trading partner, with annual trade exceeding $190 billion.

Between FY20 and FY24, India's merchandise exports to the US rose by 46 percent, from $53.1 billion to $77.5 billion. Imports from the US too increased, by 17.9 percent from $35.8 billion to $42.2 billion.

India has an opportunity to increase its exports in areas like textiles, electronics, machinery and pharmaceuticals if relatively higher tariffs are imposed on countries like China and Mexico.

Outgoing President Joe Biden had already slapped new tariffs on Chinese electric vehicles, advanced batteries, solar cells, steel, aluminium and medical equipment in early 2024, heating up the ongoing trade war between the two giant economies.

Most experts see this stance against China continuing, if not intensifying under Trump 2.0, possibly benefiting India.