On Wednesday, the Indian rupee tumbled to an all-time low of 84.23 against the US dollar following early reports from the 2024 U.S. presidential election, showing Republican candidate Donald Trump in the lead over Democrat Kamala Harris. As markets responded to the emerging political landscape, the dollar surged, putting downward pressure on the Indian rupee and other Asian currencies. This volatility could have broader implications for India’s economy, especially in areas like trade, foreign investment, and inflation.
This article unpacks the reasons behind the rupee’s sharp decline, explores the potential effects of a Trump win on India’s economic landscape, and examines the outlook for the Indian currency amid an uncertain global environment.
Rupee Hits Record Low as Dollar Surges
The Indian rupee closed at 84.23 per dollar, falling by 14 paise from its previous mark of 84.09. This decline came as the dollar index surged 1.5%, reaching a four-month high of 104.9 on November 6, driven by investor optimism about Trump’s potential return to office. Trump’s lead in the race seemed to bolster the dollar’s strength, which in turn weighed on the Indian currency. Not only the rupee but other Asian currencies experienced significant drops, declining by at least 1.2% amid election-driven market volatility.
Impact of Trump’s Potential Protectionist Policies
If Trump secures a return to the White House, analysts anticipate a renewed focus on “America First” trade policies. His earlier presidency saw the imposition of tariffs on countries like China, and there is speculation that he may consider similar measures that could impact India. Protectionist policies from the U.S. could result in higher trade barriers, potentially affecting Indian exports to the United States, a significant trading partner for India.
Additionally, Trump’s policies could lead to capital outflows from emerging markets like India. In recent weeks, Foreign Institutional Investors (FIIs) have already pulled out funds, with exchange data showing net sales worth ₹2,569.41 crore on Tuesday alone. This outflow of foreign capital has contributed to the weakening of the rupee, and if Trump’s policies deter foreign investors, the rupee could face sustained downward pressure.
Federal Reserve’s Upcoming Meeting and Interest Rate Decisions
The U.S. Federal Reserve’s monetary policy meeting later this week adds another layer of uncertainty for currency markets. The Fed is expected to discuss a potential rate cut, and any such announcement could add further volatility. Lower U.S. interest rates might encourage investors to seek higher yields in emerging markets, but with the dollar surging on election news, this potential rate cut’s effect on the rupee remains uncertain.
Forex traders and analysts are carefully watching the Fed’s decision, which could either stabilize or further destabilize the rupee. Any indication of prolonged rate hikes, especially under a Trump administration, could strengthen the dollar further, thereby pushing the rupee to new record lows.
The Resilience of the Indian Rupee Compared to Other Emerging Market Currencies
While the rupee has hit historic lows against the dollar, it remains one of the more resilient currencies among emerging markets this year. The Reserve Bank of India (RBI) has been actively intervening in the forex market to manage rupee volatility, reportedly using over $10.8 billion from its reserves to stabilize the currency amid election-induced market fluctuations. This proactive stance from the RBI has helped to limit the rupee’s slide compared to other emerging market currencies, reinforcing the currency’s relative strength.
Foreign Fund Outflows and Investor Sentiment
The rupee’s downward trajectory has been compounded by significant foreign fund outflows as investors take a cautious stance amid political uncertainty. These outflows, largely from capital markets, are influenced by both election-driven volatility and the strength of the U.S. dollar. If Trump’s lead solidifies and results in a win, foreign fund outflows could intensify, as investors might look to move capital to the U.S. to benefit from stronger returns on a fortified dollar.
Indian markets could face heightened pressure, with the rupee potentially breaching new lows if outflows continue. For investors and policymakers, this underscores the importance of managing capital flows to maintain currency stability.
As early results in the U.S. presidential election favours Donald Trump, the Indian rupee has hit a new low against the U.S. dollar. This trend reflects the ripple effects of a strengthened dollar, driven by market speculation about Trump’s potential return to the White House. The outlook for the rupee depends not only on the final U.S. election results but also on upcoming Federal Reserve actions and the Indian government’s responses to foreign fund outflows.
With India’s economic growth tied to trade and foreign investment, any long-term weakening of the rupee could impact import costs, inflation, and economic stability. However, the Reserve Bank of India’s active intervention suggests a commitment to protecting the rupee against extreme volatility. As the dust settles on the U.S. election, the coming weeks will be crucial in shaping India’s currency and economic landscape.
(With inputs from agencies)
