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Informist, Monday, Feb. 3, 2025

 

By Pratiksha

 

NEW DELHI – US President Donald Trump's looming tariff threats came into being over the weekend as he ordered sweeping tariffs on goods from Mexico, Canada, and China, causing the emerging market currencies, including the Indian currency, to decline sharply. The rupee not only took a tumble but tested the psychologically-crucial 87-per-dollar mark to hit a record low on Monday. 

 

As Trump announced the tariffs, the worst fears of market participants, who were earlier thinking that his tariff talks would be "all talks and no show", were confirmed, leading to expectations that the rupee has much more weakness in store going ahead. 

 

Market participants' fears were also deep-dyed, noting the sharp slide in the Indian currency on Monday. The rupee breached the big figure of 87-per-dollar in only three weeks after testing its last psychologically-crucial level and fell 0.7% against the dollar on Monday. 

 

 

"People thought Trump would not be acting in such a harsh manner, but now he has. Now, it is difficult to say how it will impact the rupee, since he (Trump) has also put clauses in response to retaliatory measures. But overall it is looking very bad (for the rupee)," a treasury head at a foreign bank said.

 

Trump imposed additional 25% tariff on Mexican and most Canadian imports, and 10% on goods from China, starting on Tuesday. Following this, market players were left scrambling for the worst-case scenarios, with expectations of a full-fledged global trade war breaking out being the main one. Most participants now expect the rupee to depreciate to 88 a dollar in the near-term and 90 a dollar in the medium term. 

 

"There are going to be a lot of statements and counter statements coming (after the tariff imposition). There are and will be volatile times for some time to come. We'll have to take a measured look at each and everything. You have to be very agile and nimble and see how these policies will impact (rupee) in the medium term," said Ashhish Vaidya, managing director and country treasurer, DBS Bank India.

 

Market participants flagged that Trump's imposition of tariffs on China's imports was a bigger shock, considering just a few days back he had expressed reluctance to impose tariffs on the world's second-largest economy. The offshore Chinese yuan depreciated 0.4% against the dollar on Monday. 

 

Also underpinning the currency traders' pessimism over the domestic currency is the expectation that the Reserve Bank of India may not come staunchly in the way of a sharp depreciation in the rupee.

 

Case in point: The central bank intervened through dollar sales in the spot market on Monday, but the nature of intervention was "very mild', helping the rupee to erase only 10 paise of its losses. On Monday, the Indian unit fell to a lifetime low of 87.2825 after opening at 87.0300, and went on to settle at 87.1850. 

 

Further, the lack of RBI's intervention in the offshore non-deliverable forwards market, its once preferred route of intervention, has also dampened sentiment among market players. The central bank has mostly refrained from intervening in the NDF market after its earlier aggressive interventions in the segment led to its outstanding net short positions rising sharply. 

 

"If they (RBI) are consciously not intervening in the offshore market, there is no way they will intervene heavily in spot. It is not practical. There is a limit to spending when it comes to spot," a senior treasury official at a big state-owned bank said. The RBI's net outstanding sales of dollar/rupee forward contracts climbed to a new high of $67.94 billion at the end of December, $9.09 billion higher from a month ago.

 

Dealers do not expect the apex bank to extend its unwavering support to the currency also owing to the rupee's continued overvaluation against its trading peers. "The RBI is unlikely to aggressively defend any particular level, given currency competitiveness issues. But it will also prevent very sharp moves to not let heavy one-sided bets build up--the trading band is much wider now and will likely remain so," said Dhiraj Nim, FX strategist, ANZ Banking Group.

 

The rupee's real effective exchange rate against a basket of 40 currencies, in terms of trade-based weights, was at 107.20 in December, suggesting the local currency was overvalued by around 7%.

 

Among everything, currency traders heaved a sigh of relief after India's name did not appear in Trump's first set of tariffs. They are of the view that if the same materialises, the rupee may go to a place beyond worse.  End

 

Edited by Akul Nishant Akhoury

 

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