Emerging market (EM) currencies with larger trade surplus with the US could be more at risk once Donald Trump assumes office. In case of any geopolitical risk and potential trade tension, India would be relatively better placed within the EM basket, Flavio Figueiredo, global head of foreign exchange at Citi, tells Sachin Kumar in an interview. Excerpts:
Indian rupee has recently seen periods of depreciation. Do you foresee any further depreciation?
While the rupee might move in line with the global US dollar trend, the overall India macro picture suggests a stable outlook for the rupee. Recent trends clearly suggest that the currency is an outperformer in the structural strong US dollar move. The government and the RBI have worked together to ensure a regime with overall macro stability, and this is also reflected in a stable outlook for the rupee.
With the US Fed cutting interest rates, what can be the effects on the rupee and other EM currencies in the short- to medium-term?
Over the past couple of months, the dollar has rebounded significantly from lows seen after markets started front-running Fed rate cuts. Improving inflation dynamics helped the Fed turn significantly dovish, starting the cycle with a 50-bps cut. However, with economic data continuing to be resilient and Trump 2.0 being expected to stoke inflation, the rate-cut cycle is likely to remain shallow. In addition, poor growth dynamics in Europe is expected to keep the ECB dovish. This divergence and expected US policy changes are expected to drive US dollar strength over foreseeable future and be net negative for EM (emerging market) currencies, though the impact is expected to be unequal. The Chinese yuan, euro, Mexican peso are expected to bear most of the brunt of the new Trump tariffs. The RBI over the past couple of years has ensured a stable regime for India’s forex and rates markets and we largely expect this trend to continue into the next year.
The key question for India’s forex markets will be how does the government and RBI react to even greater weakness of the yuan, given India’s large trade deficit with China. That said, in our view, the rupee will remain less volatile compared with other EM currencies.
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