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A recent report by the State Bank of India (SBI) suggests that the fluctuations in the Indian rupee attributed to the so-called "Trump Tantrum," are likely to be short-lived. The term "Trump Tantrum" refers to the initial economic reactions triggered by Donald Trump's presidency. The report indicates that while the rupee may experience some instability during the early phase of Trump's presidency, this disruption is expected to be temporary with the currency stabilizing shortly afterwards.
US Dollar Strength and Speculation Behind the Rupee’s Sharp Decline: A Strong Performance of the US Dollar
The sharp decline in the value of the rupee is primarily attributed to the robust performance of the US dollar. The US dollar index, a measure of the dollar's value against a basket of major global currencies has experienced a significant increase of 0.43%. This surge was largely fueled by strong US jobs data, which signalled a resilient American economy.
The positive US jobs report strengthened market expectations that the Federal Reserve would continue its policy of higher interest rates for an extended period. This reduced any hopes for a reduction in rates in 2025. Investors speculated that the US central bank would prioritize controlling inflation over stimulating growth through lower rates.
The US dollar's strength applied pressure on emerging market currencies across the board. However, the rupee's underperformance stood out by making its depreciation more pronounced compared to other currencies in the same category. The rupee’s sharper decline highlights the vulnerability of emerging market currencies to fluctuations in the US dollar especially when driven by strong economic indicators from the United States.
Profit-Taking and Bets on Depreciation
13th January sharp decline in the rupee was significantly driven by speculative activities in the market. Many traders who had previously taken long positions in the rupee had decided to cash in on their profits. At the same time, others speculated that the rupee would weaken further, especially since there was no strong intervention from the Reserve Bank of India (RBI). This absence of decisive action from the RBI fueled expectations that the currency could continue to lose value. Market analysts including those at Standard Chartered had foreseen the rupee potentially falling to ₹87.75 by the end of the year.
Intraday trading witnessed sharp volatility, largely due to the uncertain behaviour of the dollar index and the anticipation of future RBI measures. The fluctuating dollar index created an unpredictable environment by making it challenging for traders to predict the rupee’s short-term trajectory accurately.
The rupee's decline coincided with a rise in bond profits both domestically and internationally. The profits on India’s 10-year government bond increased from 6.8% to 6.84%, reflecting the upward trend in US Treasury yields. Specifically, the yield on the US 10-year Treasury bond climbed by 7 basis points, while the 30-year Treasury profits had surpassed the 5% mark by the end of the previous week.
Capital Outflows from Emerging Markets
The surge in US yields has a direct impact on emerging market economies such as India. Higher profits in the US make American assets more attractive to investors by prompting them to pull their funds from emerging markets. This capital flight exerts additional downward pressure on currencies like the rupee, further compounding the challenges faced by these economies.
The rupee's sharp decline can be attributed to speculative trading, profit-taking, and market predictions of continued depreciation due to the lack of strong RBI intervention. The rise in bond profits, particularly in the US, has exacerbated the situation by reducing the appeal of emerging market investments leading to capital outflows and added strain on the rupee.
Initial Volatility Expected
The SBI report points out that empirical evidence supports the idea that the impact of Trump's presidency on the Indian rupee will not last long. It explains that the rupee will likely adjust after the initial shock during the first few days of Trump's administration. This suggests that market participants and policymakers should prepare for early fluctuations but can anticipate a return to normalcy soon after.
Historical Performance of the Rupee
According to the report, historical data reveals a pattern in the rupee's performance under different U.S. administrations. It notes that the Indian rupee has generally managed better when Republicans like Trump were in power compared to Democratic administrations. This observation challenges to the prevailing market perception that the rupee might be more stable under a non-Trump or Democratic regime.
Stability During Republican Tenures
Looking at past presidencies, especially from the Nixon era onwards, the rupee has shown relative stability during Republican administrations. The SBI report suggests that this trend may continue, implying that the current apprehensions regarding the rupee's vulnerability under Trump's presidency could be overestimated.
The SBI report presents a nuanced view of the rupee's future under Trump's presidency, predicting initial volatility followed by stabilization supported by historical trends favouring Republican leadership.
Rupee's Response to Trump’s Presidency: A Temporary Adjustment
Although some fluctuations are anticipated in the short term, the current scenario does not resemble the severe disruptions seen during the "Taper Tantrum" of 2013. This observation has led analysts to believe that the Indian rupee's response to Donald Trump's presidency will only be temporary.
Factors Behind the Rupee's Decline
The report highlights that the rupee began to weaken in the latter half of 2024 mainly due to capital outflows. The victory of Donald Trump in the November 2024 presidential elections led to a stronger U.S. dollar which further contributed to the rupee's depreciation.
Rupee's Performance Against the U.S. Dollar
Since November 2024, the rupee has depreciated by around 3% against the U.S. dollar. Despite this decline, the report notes that the rupee remains one of the more stable currencies globally, especially when compared to other countries’ currencies during the same period.
Stability in Early 2024
In the first half of 2024, the Indian foreign exchange market remained relatively stable, thanks to capital inflows that were boosted by the inclusion of Indian bonds in global bond directories. This development helped protect the rupee from experiencing greater volatility, providing a boost against potential economic shocks.
Outlook for the Rupee
The report concludes that the rupee is expected to adjust to the initial impact of Trump’s presidency and stabilize in the near future. This projection aims to ease concerns about any prolonged instability, suggesting that the rupee's performance will return to steadier levels in the coming months.
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